LEXMARK INTERNATIONAL INC /KY/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NO. 1-14050

LEXMARK INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 06-1308215
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

ONE LEXMARK CENTRE DRIVE
740 WEST NEW CIRCLE ROAD
LEXINGTON, KENTUCKY 40550
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(859) 232-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___

As of March 8, 2002, there were outstanding 129,493,036 shares (excluding shares
held in treasury) of the registrant's Class A common stock, par value $.01,
which is the only class of voting common stock of the registrant, and there were
no shares outstanding of the registrant's Class B common stock, par value $.01.
As of that date, the aggregate market value of the shares of voting common stock
held by non-affiliates of the registrant (based on the closing price for the
Class A common stock on the New York Stock Exchange on March 8, 2002) was
approximately $7,501,926,133.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the company's definitive Proxy Statement for the 2002
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year, is incorporated by reference in Part III of this
Form 10-K.
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LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001

PART I

ITEM 1. BUSINESS

GENERAL

Lexmark International, Inc., ("International") is a Delaware corporation which
is the surviving company of a merger between itself and its former parent
holding company, Lexmark International Group, Inc., ("Group") consummated on
July 1, 2000. Group was formed in July 1990 in connection with the acquisition
of IBM Information Products Corporation from International Business Machines
("IBM"). The acquisition was completed in March 1991. Group had as its only
significant asset all of the outstanding common stock of International. On
November 15, 1995, Group completed its initial public offering of Class A common
stock. International now trades on the New York Stock Exchange under the symbol
"LXK." Hereinafter, the "company" and "Lexmark" will refer to Group (including
its subsidiaries, as the context requires) for all events prior to July 1, 2000
and will refer to International (including its subsidiaries, as the context
requires) for all events subsequent to the merger.

Lexmark is a leading developer, manufacturer and supplier of printing
solutions -- including laser and inkjet printers, multifunction products,
associated supplies and services -- for offices and homes. Lexmark develops and
owns most of the technology for its laser and color inkjet printers and
associated supplies, and that differentiates the company from a number of its
major competitors, including Hewlett Packard ("HP"), which purchases its laser
engines and cartridges from a third party. Lexmark also sells dot matrix
printers for printing single and multi-part forms by business users and
develops, manufactures and markets a broad line of other office imaging
products. The company operates in the office products industry segment.

Revenue derived from international sales, including exports from the United
States, make up more than half of the company's consolidated revenue with Europe
accounting for approximately two-thirds of international sales. Lexmark's
products are sold in over 150 countries in North and South America, Europe, the
Middle East, Africa, Asia, the Pacific Rim and the Caribbean. Currency
translation has significantly affected international revenue and cost of
revenue. Refer to Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Effect of Currency Exchange Rates and Exchange Rate
Risk Management for more information. As the company's international operations
continue to grow, additional management attention will be required to focus on
the operation and expansion of the company's global business and to manage the
cultural, language and legal differences inherent in international operations. A
summary of the company's revenue and long-lived assets by geographic area is
found on page 52 of this Annual Report on Form 10-K.

MARKET OVERVIEW

In 2001, estimated industry-wide revenue for printer hardware and associated
supplies in the 1-50 pages per minute ("ppm") speed category, including
monochrome (black) and color laser, inkjet and dot matrix printers, exceeded $40
billion. Lexmark management believes that industry revenue was flat or declined
slightly in 2001, due to difficult economic conditions. Industry analysts
estimate that the market will in the aggregate experience modest growth through
2005. Management also believes that the total printer output opportunity will
expand as copiers and

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Certain information contained in the "Market Overview" section has been obtained
from industry sources. Data available from industry analysts varies widely among
sources. The company bases its analysis of market trends on the data available
from several different industry analysts.

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fax machines shift from being standalone analog devices to being part of
multifunction printers. With the integration of print/copy/fax, traditional copy
and fax pages are now becoming part of the total printing opportunity.
Management believes that this shift should favor companies like Lexmark based on
its experience in providing industry leading network printing solutions and
multifunction printers.

The laser printer market can be divided into two major categories -- shared
workgroup printers, which are typically attached directly to networks, and lower
priced desktop printers attached to PCs or small workgroup networks. The shared
workgroup printers include all color and monochrome laser printers that are
easily upgraded to include additional input and output capacity and may include
high performance internal network adapters. Most shared workgroup printers also
have sophisticated network management software tools. Based on industry data,
within the overall laser printer market, Lexmark has gained market share over
the past five years and it is currently second in the market. In the shared
workgroup market, which is dominated by HP, Lexmark management believes that
Lexmark is also second in worldwide market share with more than twice the market
share of the next nearest competitor. In the lower priced desktop laser printer
category, Lexmark was one of the top three vendors in 2001. Management believes
the company has recently strengthened its market share position in the lower
priced desktop laser category.

Laser printer unit growth in recent years has generally exceeded the growth rate
of laser printer revenue due to unit growth in lower priced desktop laser
printers and unit price pressure and management believes this trend will
continue. This pricing pressure is partially offset by the tendency for
customers in the shared workgroup laser market to add optional features
including network adapters, additional memory, paper handling and multifunction
capabilities.

Management believes that some business users may choose inkjet printers as a
lower priced alternative or supplement to laser printers for personal desktop
use. The consumer printer market today consists almost entirely of color inkjet
printers. Based on industry data, over the last three years the company's unit
market share has doubled to approximately 20%. Management believes the inkjet
market, including multifunction printers, was flat or slightly declined in 2001.
However, Lexmark's unit volumes grew slightly in 2001. Growth in color inkjet
printer revenue has been slower than unit growth due to pricing pressure, which
management expects to continue. The greater affordability of color inkjet
printers as well as the growth in the inkjet-based multifunction devices
(all-in-one printers) have been important factors in the growth of this market.

The Internet is positively impacting Lexmark's business in several ways.
Management believes that as more information is available over the Internet, and
new products are being developed to access it, more of the information from the
Internet is being printed. This is especially beneficial for printer and
supplies manufacturers since so much of the Internet content is rich in color
and graphics. The Internet also allows Lexmark to communicate with and provide
support to customers in new and more valuable ways in addition to reducing costs
through achieving operational efficiencies.

The markets for dot matrix printers and most of the company's other office
imaging products, including supplies for select IBM branded printers,
aftermarket supplies for original equipment manufacturer ("OEM") products, and
typewriters continue to decline.

STRATEGY

Lexmark's strategy is based on a business model of building an installed base of
printers that will then generate demand for Lexmark's printer supplies and
services. Lexmark is executing a three-pronged strategy in implementing its
business model. First, the company is pursuing an increased share of printing
solutions in the corporate and consumer markets. Second, Lexmark is

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using its technological leadership to maintain a competitive difference in its
printers, supplies, software and services. Third, the company uses a
differentiated marketing and sales approach.

Lexmark's corporate customer strategy is to target large corporations and the
public sector. The strategy is to increase market share by providing high
quality, technologically advanced products at competitive prices. To promote
Lexmark brand awareness and market penetration, Lexmark will continue to
identify and focus on customer segments where Lexmark can differentiate itself
by providing printing solutions that meet specific customer needs.

For the corporate customer, Lexmark continues to offer an array of advanced
laser printing solutions with superior features and functions at competitive
prices. The company believes that it is well-positioned to take advantage of the
potential growth in demand for network attached printers due to its development
and ownership of all key hardware and software technology components, including
network connectivity, management tools and work flow enhancement solutions.
Lexmark continually focuses on creating industry-wide standards for laser
printer performance and enhancing its laser printers to function efficiently in
a networked environment and provide significant flexibility and manageability to
the network administrator.

The company's consumer market strategy is to generate demand for Lexmark color
inkjet printers by offering high-quality, competitively-priced products to
consumers and businesses through retail and OEM channels. The company expects
that product improvements in this market will result in faster printing and
better print quality and it continues to develop its own technology to meet
these customer needs. The company continues to support all the major PC
operating systems such as Windows, Mac O/S and Linux. The company continues to
take advantage of the operating systems and increasing computing power of the PC
to drive printing functions and to produce a product that is easier to use.
Lexmark believes that its core product offerings in this market, including the
"Z" and "X" families of color inkjet printers, will also permit it to build
brand recognition in the retail channels. The company recognized early on that
as PC prices fell below $1,000 there was a need for high-quality, low-priced
printers that retailers could bundle with the PCs. Lexmark has aggressively
reduced costs while pushing the performance and features of higher-end color
inkjets into this sub-$100 segment.

Because of Lexmark's exclusive focus on printing solutions, the company has
successfully advanced a strategy of forming alliances and OEM arrangements with
more than fifteen companies, including Dell, IBM and Samsung. The entrance of a
competitor that is also exclusively focused on printing solutions could have a
material adverse impact on the company's strategy and financial results.

The company's strategy for dot matrix printers and other office imaging products
is to continue to offer high-quality products while managing cost to maximize
cash flow and profit.

PRODUCTS

Business Products

In 2001, the company introduced a wide range of new monochrome and color
business printers, multifunction printers, and associated features, application
solutions, and software upgrades. The new monochrome laser printers begin at the
high end with the wide format W820. At 45 ppm, the W820 is the fastest printer
ever introduced by Lexmark and is supported with an array of paper handling and
finishing options that make it well suited for departmental printing needs. The
T622 and T620 monochrome laser printers at 40 and 30 ppm, respectively, are
designed to support large and medium workgroups and have optional paper input
and output features, including a new stapler and offset stacker. The T522 and
T520 monochrome laser printers at 25 and 20 ppm, respectively, are designed to
support medium and small workgroups. For the small workgroup and personal
segments, the company introduced the E322, E320, and E210 monochrome laser
printers at 16, 16, and 12 ppm, respectively.

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The new color printers introduced in 2001 include the C910 and C750, both with
single pass technology. The C910 prints both monochrome and color pages at 28
ppm and supports printing on tabloid size paper. The C750 is the first Lexmark
color laser printer to feature the company's internally developed color laser
technology. The C750 prints both monochrome and color pages at 20 ppm. At the
time of their introduction, both printers set new industry standards for price
per rated speed in their respective categories. The company also introduced the
C720, a color laser printer that prints at 24 ppm in monochrome and six ppm in
color.

The new multifunction printers introduced in 2001 include the X820e, X522, X520,
and X720. Multifunction options were also provided for the T620 and T622. Each
of these products provide print/copy/fax/scan capability. The X820e comes with
an intuitive touch screen display and the ability to integrate with corporate
directories and leverage existing network security to regulate access. These
characteristics make it very easy for X820e users to scan paper documents and
fax or e-mail them. The company also introduced enhancements to its document
routing software, the Lexmark Document Distributor, which enables customers to
increase productivity and streamline business processes.

An enhanced version of MarkVision Professional, Lexmark's print management
software that provides remote configuration, monitoring, and problem resolution
of network print devices, was also introduced. The company introduced new
application solution cards that support web, bar code, and IPDS printing for the
new T52x, T62x and W820 printers. In addition, the company introduced the new
MarkNet N2003fx internal print servers to move its Lexmark C, M, T, and W
families of printers into the next generation of connectivity technology by
providing a fiber solution.

Inkjet Printers

During 2001, the company introduced the third generation "Z" family of color
inkjet printers. The six models in this family offer up to 2,400 x 1,200 dpi at
speeds ranging from eight to sixteen ppm in black and five to eight ppm in color
and all feature the Accu-Feed paper handling system. In 2001, the company also
introduced the new "X" series of all-in-one printers, all of which provide
print, scan and copy capabilities. The X63 also provides standalone faxing
capabilities. The Lexmark "X" series products have redefined the multifunction
category by offering cutting edge technology at consumer-friendly prices.

Dot Matrix Printers

The company continues to market five dot matrix printer models for customers who
print a large volume of multi-part forms.

Supplies

The company designs, manufactures, and distributes a variety of cartridges and
other supplies for use in its installed base of laser, inkjet, and dot matrix
printers. Lexmark is currently the exclusive source for new printer cartridges
for the printers it manufactures. The company's revenue and profit growth from
its supplies business is directly linked to the company's ability to increase
the installed base of its laser and inkjet printers and customer usage of those
printers. The company also offers a broad range of other office imaging
products, including typewriter products with the IBM logo, and other OEM
printers, using both impact and non-impact technology.

Service and Support

For the company's printer products, a warranty period of at least one year is
included, and customers typically have the option to purchase an extended
warranty. The warranties generally include a toll-free technical support service
as well as on-line support via the Internet.

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MARKETING AND DISTRIBUTION

The company markets and distributes its corporate customer printers primarily
through its well-established distributor network, which includes such
distributors as Ingram Micro, Tech Data, Arrow, Synnex, Computer 2000 and
Northamber. The company's products are also sold through solution providers, who
offer custom solutions to specific markets. In addition to its distributors and
reseller networks, the company employs large account sales and marketing teams
whose mission is to generate demand for Lexmark printing solutions primarily
among large corporations as well as the public sector. Sales and marketing teams
have focused on industry segments such as financial services, retail/pharmacy,
manufacturing, government, education and health care. Those teams, in
conjunction with the company's development and manufacturing teams, are able to
customize printing solutions to meet customer specifications for printing
electronic forms, media handling, duplex printing and other document workflow
solutions.

The company distributes its color inkjet printers primarily through more than
15,000 retail outlets worldwide including office superstores such as Staples,
Office Depot and OfficeMax, computer superstores such as CompUSA, and consumer
electronics stores such as Best Buy and Circuit City. The company also
distributes its color inkjet printers to other large chains such as Wal-Mart and
Target and to overseas stores such as Dixon's, Carrefour, Harvey Norman, T-Zone,
Musimundo and Vobis.

The company also sells its printers through alliances and OEM arrangements with
more than fifteen companies, including Dell, IBM and Samsung.

Lexmark's Internet website enables customers to purchase the company's products
and services directly. It also provides important information regarding the
company's hardware and supplies products, services and technical support, as
well as reseller locations in various countries. Lexmark is using the power of
the Internet as it expands its business-to-business and business-to-consumer
markets.

The company's international sales are an important component of its operations.
The company's sales and marketing activities in its global markets are organized
to meet the needs of the local jurisdictions and the size of their markets. The
company's western European marketing operation is structured similarly to its
domestic marketing activity. The company's products are available from major
information technology resellers such as Northamber and in large markets from
key retailers such as Media Markt in Germany, Dixon's in the United Kingdom and
Carrefour in France. Australian and Canadian marketing activities, like those in
the United States, focus on large account demand generation and vertical
markets, with orders filled through distributors and retailers. The company's
eastern European, Middle East, African, Latin American and Asia Pacific markets,
other than Australia, are served through a combination of Lexmark sales offices,
strategic partnerships and distributors. The company also has sales and
marketing efforts for OEM opportunities.

The company's printer supplies and other office imaging products are generally
available at the customer's preferred point of purchase through multiple
channels of distribution. Although channel mix varies somewhat depending on the
geography, substantially all of the company's supplies products sold
commercially in 2001 were sold through the company's network of
Lexmark-authorized supplies distributors and resellers who sell directly to end
users or to independent office supply dealers.

No single customer has accounted for more than 10% of the company's consolidated
revenues since 1996.

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COMPETITION

The company's strategy requires that the company continue to develop and market
new and innovative products at competitive prices. New product announcements by
the company's principal competitors, however, can have, and in the past have
had, a material adverse effect on the company's financial results. Such new
product announcements can quickly undermine any technological competitive edge
that one manufacturer may enjoy over another and set new market standards for
quality, speed and function. Furthermore, knowledge in the marketplace about
pending new product announcements by the company's competitors may also have a
material adverse effect on the company inasmuch as purchasers of printers may
defer purchasing decisions until the announcement and subsequent testing of such
new products.

In recent years, the company and its principal competitors, many of which have
significantly greater financial, marketing and/or technological resources than
the company, have regularly lowered prices on printers and are expected to
continue to do so. The company is vulnerable to these pricing pressures which,
if not mitigated by cost and expense reductions, may result in lower
profitability and could jeopardize the company's ability to grow or maintain
market share and build an installed base of Lexmark printers. The company
expects that, as it competes more successfully with its larger competitors, the
company's increased market presence may attract more frequent challenges, both
legal and commercial, from its competitors, including claims of possible
intellectual property infringement.

The markets for printers and supplies are highly competitive. The laser printer
market is dominated by HP, which has a widely recognized brand name and has been
estimated to have an approximate 50% market share. Several other large vendors
such as Canon, Xerox, Brother and Minolta also compete in the laser printer
market.

The company's primary competitors in the color inkjet printer market are HP,
Epson and Canon, who together account for approximately 75% to 80% of worldwide
color inkjet printer sales. As with laser printers, if pricing pressures are not
mitigated by cost and expense reductions, the company's ability to maintain or
build market share and its profitability could be adversely affected. In
addition, the company must compete with HP, Epson and Canon for retail shelf
space for its low-end laser printers, inkjet printers and their associated
supplies.

Although Lexmark is currently the exclusive supplier of new printer cartridges
for its laser and inkjet printers, there can be no assurance that other
companies will not develop new compatible cartridges for Lexmark printers. In
addition, refill and remanufactured alternatives for some of the company's
cartridges are available from independent suppliers and, although generally
offering lower print quality, compete with the company's supplies business. As
the installed base of laser and inkjet printers grows and ages, the company
expects competitive refill and remanufacturing activity to increase.

The market for other office imaging products is extremely competitive and the
impact segment of the supplies market is declining. Although the company has
rights to market certain IBM branded supplies until December 2004 and certain
others until December 2007, there are many independent ribbon and toner
manufacturers competing to provide compatible supplies for IBM branded printing
products. The company is increasingly less dependent on revenue and
profitability from its other office imaging products than it has been
historically. Management believes that the operating income associated with its
other office imaging products will continue to decline.

MANUFACTURING

The company operates manufacturing control centers in Lexington, Kentucky and
Geneva, Switzerland, and has manufacturing sites in Lexington, Boulder,
Colorado, Orleans, France, Sydney, Australia, Rosyth, Scotland, Juarez, Mexico,
Chihuahua, Mexico, Reynosa, Mexico and

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Lapu-Lapu City, Philippines. During 2001, the company expanded existing
facilities in Lapu-Lapu City, Philippines and established a new Asian
customization center in Shenzen, China. Most of the company's laser and inkjet
technologies are developed in Lexington and Boulder. The company's manufacturing
strategy is to keep processes that are technologically complex, proprietary in
nature and higher value added, such as the manufacture of inkjet cartridges, at
the company's own facilities. The company has provided some of its technical
expertise to several lower cost vendors who provide additional printer
production capability. Lexmark oversees these vendors to ensure that products
meet the company's quality standards.

In 2001, the company relocated manufacturing, primarily laser printers, to
Mexico and China. Refer to Note 3 of the Notes to Consolidated Financial
Statements for more information related to the company's restructuring plans.

The company's development and manufacturing operations for laser printer
supplies which include toners, photoconductor drums, developers, charge rolls
and fuser rolls, are located in Boulder. The company has made significant
capital investments in the Boulder facility to expand toner and photoconductor
drum processes.

MATERIALS

The company procures a wide variety of components used in the manufacturing
process, including semiconductors, electro-mechanical components and assemblies,
as well as raw materials, such as plastic resins. Although many of these
components are standard off-the-shelf parts that are available from multiple
sources, the company often utilizes preferred supplier relationships to better
ensure more consistent quality, cost and delivery. Typically, these preferred
suppliers maintain alternate processes and/or facilities to ensure continuity of
supply. The company generally must place commitments for its projected component
needs approximately three to six months in advance. The company occasionally
faces capacity constraints when there has been more demand for its printers and
associated supplies than initially projected. From time to time, the company may
be required to use air shipment to expedite product flow, which can adversely
impact the company's operating results. Conversely, in difficult economic times,
the company's inventory can grow as market demand declines.

Some components of the company's products are only available from one supplier,
including certain custom chemicals, microprocessors, application specific
integrated circuits and other semiconductors. In addition, the company sources
some printer engines and finished products from OEMs. Although the company
purchases in anticipation of its future requirements, should these components
not be available from any one of these suppliers, there can be no assurance that
production of certain of the company's products would not be disrupted. Such a
disruption could interfere with the company's ability to manufacture and sell
products and materially adversely affect the company's business. Conversely,
during economic slowdowns, the company may build inventory of components as
demand decreases.

RESEARCH AND DEVELOPMENT

The company's research and development activity for the past several years has
focused on laser and inkjet printers and supplies and on network connectivity
products. The company has been able to keep pace with product development and
improvement while spending less than its larger competitors by selectively
targeting its research and development efforts. It has also been able to achieve
significant productivity improvements and minimize research and development
costs. In the case of certain products, the company may elect to purchase
products and key components from third party suppliers.

The company is committed to being a technology leader in its targeted areas and
is actively engaged in the design and development of additional products and
enhancements to its existing products. Its engineering effort focuses on laser,
inkjet, and connectivity technologies, as well as

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design features that will increase efficiency and lower production costs. The
process of developing new technology products is complex and requires innovative
designs that anticipate customer needs and technological trends. Research and
development expenditures were $246 million in 2001, $217 million in 2000 and
$184 million in 1999. In addition, the company must make strategic decisions
from time to time as to which new technologies will produce products in market
segments that will experience the greatest future growth. There can be no
assurance that the company can continue to develop the more technologically
advanced products required to remain competitive.

BACKLOG

Although the company experiences availability constraints from time to time for
certain of its products, the company generally fills its orders within 30 days
of receiving them. Therefore, the company usually has a backlog of less than 30
days at any one time, which the company does not consider material to its
business.

EMPLOYEES

As of December 31, 2001, the company had approximately 12,700 employees
worldwide of which 4,900 are located in the U.S. and the remaining 7,800 in
Europe, Canada, Latin America, Asia, and the Pacific Rim. None of the U.S.
employees are represented by any union. Employees in France, Germany and the
Netherlands are represented by Statutory Works Councils. Substantially all
regular employees have stock options.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the company and their respective ages, positions and
years of service with the company are set forth below.

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Dr. Curlander has been a Director of the company since February 1997. Since
April 1999, Dr. Curlander has been Chairman and Chief Executive Officer of the
company. From May 1998 to April 1999, Dr. Curlander was President and Chief
Executive Officer of the company. From February 1997 to May 1998, Dr. Curlander
was President and Chief Operating Officer of the company, and from January 1995
to February 1997, he was Executive Vice President, Operations of the company. In
1993, Dr. Curlander became a Vice President of the company, and from 1991 to
1993 he was General Manager of the company's printer business.

Mr. Morin has been Executive Vice President and Chief Financial Officer of the
company since January 2000. From January 1996 to January 2000, Mr. Morin was
Vice President and Chief Financial Officer of the company. Prior to joining the
company, Mr. Morin held various executive and senior management positions with
Huffy Corporation, including most recently, the position of Executive Vice
President and Chief Operating Officer.

Ms. Affeldt has been Vice President of Human Resources of the company since July
1996. Prior to such time and since 1991, Ms. Affeldt served as Director of Human
Resources. Prior to 1991, Ms. Affeldt held various human resource management
positions with IBM.

Mr. Bahous has been Vice President, Customer Services of the company since July
2001. From January 1999 to July 2001, Mr. Bahous served as Vice President and
General Manager, Customer Services Europe. From January 1997 to January 1999,
Mr. Bahous was a Vice President in the company's Imaging Solutions Division in
Europe. Prior to such time and since joining the company in 1991, Mr. Bahous
held various marketing, operations and financial management positions in Europe.

Mr. Bork has been Vice President, Tax of the company since May 2001. From
October 1996 to May 2001, he was Director of Taxes of the company. Prior to
joining the company, Mr. Bork was Director of Taxes with Cray Research, Inc.
Prior to his tenure at Cray Research, Inc., Mr. Bork was with the accounting
firm of Coopers & Lybrand, most recently serving as Director of International
Tax in Coopers & Lybrand's Minneapolis office.

Mr. Braun has been Treasurer of the company since August 1998. Mr. Braun served
as Director, Investor Relations from October 1995 until his appointment as
Treasurer, and as Manager of Currency Exposure from the time he joined the
company in 1992 up to his appointment as Director, Investor Relations. Prior to
joining the company, Mr. Braun held various financial positions with Cummins
Engine Co.

Mr. Cole has been Vice President and General Counsel of the company since July
1996 and Corporate Secretary since February 1996. Prior to such time, commencing
in March 1991, Mr. Cole served as Corporate Counsel and then Assistant General
Counsel. Prior to joining the company, Mr. Cole was associated with the law firm
of Cahill Gordon & Reindel.

Mr. Craig has been Vice President and President of the company's Consumer
Printer Division since November 2000. From June 2000 to November 2000, Mr. Craig
served as a Vice President of the company, reporting to the Chairman and Chief
Executive Officer. From October 1997 to June 2000, Mr. Craig served as a Vice
President in the company's Business Printer Division, and prior to such time, he
served as a Director in the company's Business Printer Division.

Mr. Goodnight has been Vice President, Asia Pacific and Latin America since June
2001. From May 1998 to June 2001, Mr. Goodnight served as Vice President and
Corporate Controller of the company. From February 1997 to May 1998, he served
as Controller of the company. Prior to such time and since January 1994, when he
joined the company, Mr. Goodnight served as CFO for the company's Business
Printer Division. Prior to joining the company, Mr. Goodnight held various
controller positions with Calcomp, a division of Lockheed Martin Corporation.

Mr. Rooke has been Vice President and President of the company's Printing
Solutions and Services Division since May 2001 when it was formed. From December
1999 to May 2001,

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Mr. Rooke was Vice President and President of the company's Business Printer
Division, and from June 1998 to December 1999, Mr. Rooke was Vice President and
President of the company's Imaging Solutions Division. Mr. Rooke served as Vice
President, Worldwide Marketing for the company's Consumer Printer Division from
September 1996 up to his appointment as a division president. Prior to such
time, he held various positions within the company's printer divisions and
became Vice President and General Manager of Dot Matrix/Entry Laser Printers in
1994. Prior to joining the company, Mr. Rooke held various positions with IBM.

Mr. Rydell has been Vice President of Corporate Communications since he joined
the company in January 1998. Prior to joining the company, Mr. Rydell was Vice
President of Corporate Communications for The Timberland Company from December
1994 to January 1998. Prior to that, Mr. Rydell served as Director of Worldwide
Communications for Dell Computer Corporation.

Mr. Stromquist has been Vice President and Corporate Controller of the company
since July 2001. From July 1999 to July 2001, Mr. Stromquist served as Vice
President of Alliances/ OEM in the company's Consumer Printer Division. From
March 1997 to July 1999, he served as Vice President of Finance of the company's
Consumer Printer Division. Prior to such time and since joining the company in
1991, Mr. Stromquist was Director of Corporate Planning.

INTELLECTUAL PROPERTY

The company's intellectual property is one of its major assets and the ownership
of the technology used in its products is important to its competitive position.
The company has about 120 patent cross-license agreements of various types with
various third parties. These license agreements include agreements with, for
example, Canon and HP. Most of these license agreements provide cross-licenses
to patents arising from patent applications first filed by the parties to the
agreements before certain dates in the early 1990s, with the date varying from
agreement to agreement. Each of the IBM, Canon and HP cross-licenses grants
worldwide, royalty-free, non-exclusive rights to the company to use the covered
patents to manufacture certain of its products. Certain of the company's
material license agreements, including those that permit the company to
manufacture its current design of laser and inkjet printers and aftermarket
laser cartridges for certain OEM printers, terminate as to certain products upon
certain "changes of control" of the company. The company also holds a number of
specific patent licenses obtained from third parties to permit the production of
particular features in products.

The company holds approximately 1,500 patents worldwide and has approximately
1,100 pending patent applications worldwide covering a range of subject matter.
The company has filed over 2,600 worldwide patent applications since its
inception in 1991. The company's patent strategy includes obtaining patents on
key features of new products which it develops and patenting a range of
inventions contained in new supply products such as toner and ink cartridges for
printers. Where appropriate, the company seeks patents on inventions flowing
from its general research and development activities. While no single patent or
series of patents is material to the company, the company's patent portfolio in
the aggregate serves to protect its product lines and offers the possibility of
entering into license agreements with others.

The company designs its products to avoid infringing the intellectual property
rights of others. The company's major competitors, such as HP and Canon, have
extensive, ongoing worldwide patenting programs. As is typical in technology
industries, disputes arise from time to time about whether the company's
products infringe the patents or other intellectual property rights of major
competitors and others. As the company competes more successfully with its
larger competitors, more frequent claims of infringement may be asserted.

The company has trademark registrations or pending trademark applications for
the name LEXMARK in approximately 70 countries for various categories of goods.
The company also

10

owns a number of trademark applications and registrations for product names,
such as the OPTRA laser printer name.

The company holds worldwide copyrights in computer code, software and
publications of various types.

ENVIRONMENTAL AND REGULATORY MATTERS

The company's operations, both domestically and internationally, are subject to
numerous laws and regulations, particularly relating to environmental matters
that impose limitations on the discharge of pollutants into the air, water and
soil and establish standards for the treatment, storage and disposal of solid
and hazardous wastes. The company is also required to have permits from a number
of governmental agencies in order to conduct various aspects of its business.
Compliance with these laws and regulations has not had and is not expected to
have a material effect on the capital expenditures, earnings or competitive
position of the company. There can be no assurance, however, that future changes
in environmental laws or regulations, or in the criteria required to obtain or
maintain necessary permits, will not have an adverse effect on the company's
operations.

ITEM 2. PROPERTIES

The company's corporate headquarters and principal development facilities are
located on a 386 acre campus in Lexington, Kentucky. At December 31, 2001, the
company owned or leased 7.0 million square feet of administrative, sales,
service, research and development, warehouse and manufacturing facilities
worldwide. Approximately 4.5 million square feet is located in the United States
and the remainder is located in various international locations. The company's
principal international manufacturing facilities are in Mexico, the Philippines,
Scotland and Australia. The principal domestic manufacturing facility is in
Colorado. The company also owns and leases customer technical support call
centers worldwide, the largest of which are in Kentucky, Florida and Ireland.
The company owns approximately 63% of the worldwide square footage and leases
the remaining 37%. The leased property has various lease expiration dates. The
company believes that it can readily obtain appropriate additional space as may
be required at competitive rates by extending expiring leases or finding
alternative space.

None of the property owned by the company is held subject to any major
encumbrances and the company believes that its facilities are in good operating
condition.

ITEM 3. LEGAL PROCEEDINGS

In late 2001, the company and certain of its officers and directors were named
as defendants in four substantially identical securities class actions, which
have been consolidated in the U.S. District Court for the Eastern District of
Kentucky. The complaints seek unspecified damages on behalf of a purported class
consisting of purchasers of the company's stock during the period March 20, 2001
through October 22, 2001. Plaintiffs allege that the defendants made false and
misleading statements about the company's business and financial performance in
violation of Sections 10(b) and 20(a) (as well as Rule 10b-5) of the Securities
Exchange Act of 1934. The company believes the claims are without merit, and
intends to vigorously defend them.

The company and Pitney Bowes, Inc. ("PBI") are involved in litigation in the
U.S. District Court for the Eastern District of Kentucky in which PBI alleges
that certain of the company's printers infringe the claims of PBI's patent
4,386,272, and that such infringement is willful. The company believes, based on
the opinion of outside counsel, that it does not infringe the patent. The
company believes the claims are without merit, and intends to vigorously defend
them.

11

The company is also party to various litigation and other legal matters that are
being handled in the ordinary course of business. The company does not believe
that any legal proceedings to which it is a party or to which any of its
property is subject is likely to have a material adverse effect on the company's
financial position or results of operations.

As the company competes more successfully with its larger competitors, the
company's increased market presence may attract more frequent legal challenges
from its competitors, including claims of possible intellectual property
infringement. There can be no assurance that any pending litigation or any
litigation that may result from the current claims or any future claims by these
parties or others would not have a material adverse effect on the company's
financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Lexmark's Class A common stock is traded on the New York Stock Exchange under
the symbol LXK. As of March 8, 2002, there were 1,911 holders of record of the
Class A common stock and there were no holders of record of the Class B common
stock. Information regarding the market prices of the company's Class A common
stock appears in Part II, Item 8, Note 18 of the Notes to Consolidated Financial
Statements.

The company has never declared or paid any cash dividends on the Class A common
stock and has no current plans to pay cash dividends on the Class A common
stock. The payment of any future cash dividends will be determined by the
company's board of directors in light of conditions then existing, including the
company's earnings, financial condition and capital requirements, restrictions
in financing agreements, business conditions, certain corporate law requirements
and various other factors.

12

ITEM 6. SELECTED FINANCIAL DATA

The table below summarizes recent financial information for the company. For
further information refer to the company's financial statements and notes
thereto presented under Part II, Item 8 of this Form 10-K.

(Dollars in Millions, Except per Share Data)
- --------------------------------------------------------------------------------

(1) Restructuring and other charges in 2001 were $87.7 million ($64.5 million,
net of tax) and resulted in a 48 cent reduction in diluted net earnings per
share. Inventory write-offs of $29.3 million associated with the
restructuring actions were included in cost of revenue.
(2) Restructuring and related charges in 2000 were $41.3 million ($29.7 million,
net of tax) and resulted in a 22 cent reduction in diluted net earnings per
share.
(3) Provision for income taxes in 2001 includes a $40 million non-recurring
benefit from the resolution of income tax matters.
(4) Represents extraordinary after-tax loss caused by the early extinguishment
of the company's senior subordinated notes.
(5) All data prior to 1999 has been restated to reflect a two-for-one stock
split on June 10, 1999.
(6) Unusual item in 2001 represents the restructuring and other charges
discussed in (1) above and the resolution of income tax matters discussed in
(3) above. Unusual item in 2000 represents the restructuring and related
charges discussed in (2) above. Unusual item in 1997 represents the
extraordinary after-tax loss discussed in (4) above.
(7) Cash flows from investing and financing activities, which are not presented,
are integral components of total cash flow activity.
(8) Represents the number of full-time equivalent employees at December 31 of
each year.

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto:

OVERVIEW

Lexmark International, Inc. ("International," and together with its
subsidiaries, the "company" or "Lexmark") is a leading developer, manufacturer
and supplier of printing solutions -- including laser and inkjet printers,
multifunction products, associated supplies and services -- for offices and
homes. The company also sells dot matrix printers for printing single and
multi-part forms for business users and develops, manufactures and markets a
broad line of other office imaging products.

In the past five years, the worldwide printer industry has seen growth in laser
and inkjet printers as a result of the increasing penetration of personal
computers and local area networks into home and office markets. During this
period, the company's own product mix has evolved, with its laser and inkjet
printers and associated supplies representing an increasing percentage of its
sales volume and revenue, particularly as the increasing base of installed
Lexmark printers generates additional revenue from recurring sales of supplies
for those printers (primarily laser and inkjet cartridges). Lexmark believes
that its total revenue will continue to grow due to projected overall market
growth for 2001 to 2005, despite a flat to slightly declining market from 2000
to 2001. The company experienced increases in market share in both the laser and
inkjet printer categories in 2001 despite a difficult economic environment and
an increasingly aggressive competitive market with respect to product pricing.

In recent years, the company's growth rate in sales of printer units has
generally exceeded the growth rate of its printer revenue due to selling price
reductions and the introduction of new lower priced products in both the laser
and inkjet printer markets. In the laser printer market, unit price reductions
are partially offset by the tendency of customers to add optional features
including network adapters, additional memory, paper handling and multifunction
capabilities. In the inkjet printer market, advances in color inkjet technology
have resulted in printers with higher resolution and improved performance while
increased competition has led to lower prices. The greater affordability of
color inkjet printers as well as the growth in the all-in-one category have been
important factors in the growth of this market.

As the installed base of Lexmark laser and inkjet printers continues to grow,
management expects the market for supplies will grow as well, as such supplies
are routinely required for use throughout the life of the printers. While profit
margins on printer hardware have been negatively affected by competitive pricing
pressure, the supplies are a relatively high margin, recurring business, which
the company expects to contribute to the stability of its earnings over time.

The company's dot matrix printers and other office imaging products include many
mature products such as supplies for IBM printers, typewriters and other impact
supplies that require little ongoing investment. The company expects that the
market for these products will continue to decline, and has implemented a
strategy to continue to offer high-quality products while managing cost to
maximize cash flow and profit.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Lexmark's discussion and analysis of its financial condition and results of
operations are based upon the company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of consolidated financial
statements requires the company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
14

disclosure of contingent assets and liabilities. On an on-going basis, the
company evaluates its estimates, including those related to customer programs
and incentives, product returns, bad debts, inventories, intangible assets,
income taxes, warranty obligations, restructuring, pensions and other
post-retirement benefits, and contingencies and litigation. The company bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

The company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. The company records estimated reductions to revenue for
customer programs and incentive offerings including special pricing agreements,
price protection, promotions and other volume-based incentives. If market
conditions were to decline, the company may take actions to increase customer
incentive offerings, possibly resulting in an incremental reduction of revenue
at the time the incentive is offered. The company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. The company provides for
the estimated cost of product warranties at the time revenue is recognized.
While the company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its component
suppliers, the company's warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from the company's estimates, revisions to the estimated
warranty liability would be required. The company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value. Likewise, the company
records an adverse purchase commitment liability when anticipated market sales
prices are lower than committed costs. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
and adverse purchase commitment liabilities may be required. Management also
considers potential impairment of both tangible and intangible assets when
circumstances indicate that the carrying amount of an asset may not be
recoverable.

The company estimates the expected return on plan assets, discount rate,
involuntary turnover rate, rate of compensation increase and future health care
costs, among other things, and relies on actuarial estimates to assess the
future potential liability and funding requirements of the company's pension,
postretirement and postemployment plans. These estimates, if incorrect, could
have a significant impact on the company's consolidated financial position,
results of operations or cash flows. The company estimates its tax liability
based on current tax laws in the statutory jurisdictions in which it operates.
These estimates include judgments about deferred tax assets and liabilities
resulting from temporary differences between assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes,
as well as about the realization of deferred tax assets. If the provisions for
current or deferred taxes are not adequate, if the company is unable to realize
certain deferred tax assets or if the tax laws change unfavorably, the company
could experience potential significant losses in excess of the reserves
established. Likewise, if the provisions for current and deferred taxes are in
excess of those eventually needed, if the company is able to realize additional
deferred tax assets or if tax laws change favorably, the company could
experience potential significant gains.

RESTRUCTURING AND OTHER CHARGES

During the fourth quarter of 2001, Lexmark's management and board of directors
approved a restructuring plan (the "2001 restructuring") that includes a
reduction in the company's global
15

workforce of up to 12 percent. This plan provides for a reduction in
infrastructure and overhead expenses, the elimination of the company's business
class inkjet printer, and the closure of an electronic card manufacturing
facility in Reynosa, Mexico. Restructuring and related charges of $58.4 million
($42.9 million, net of tax) were expensed during the fourth quarter of 2001.
These charges were comprised of $36.0 million of accrued restructuring costs
related to separation and other exit costs, $11.4 million associated with a
pension curtailment loss related to the employee separations and $11.0 million
related to asset impairment charges. The company also recorded $29.3 million
($21.6 million, net of tax) of associated restructuring-related inventory
write-offs resulting from the company's decision to eliminate its business class
inkjet printer, to limit the period over which the company will provide
replacement parts for products no longer in production, and to exit the
electronic card manufacturing business. The inventory write-offs are included in
the cost of revenue line on the statements of earnings.

The accrued restructuring costs for employee separations of $26.3 million are
associated with approximately 1,600 employees worldwide from various business
functions and job classes. Employee separation benefits include severance,
medical and other benefits. As of December 31, 2001, approximately 200 employees
had exited the business under the 2001 restructuring plan.

The other exit costs of $9.7 million are primarily related to vendor and lease
cancellation charges.

The $11.0 million charge for asset impairment was determined in accordance with
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
resulted from the company's decision to abandon certain assets consisting
primarily of machinery and equipment used in the manufacture of the company's
business class inkjet printers and electronic cards. The charge for asset
impairments is included in the restructuring and related charges line of the
statements of earnings.

In total, the company expects the 2001 pre-tax charge of $87.7 million to result
in cash payments of approximately $36.0 million and non-cash charges of
approximately $51.7 million. The cash payments are primarily for employee
separations and other exit costs. Restructuring activities are expected to be
substantially completed during the year 2002. Annual savings from the 2001
restructuring should approximate $55 million, with about $40 million being
achieved in 2002. These savings will be used to offset competitive pricing
impacts and for new investments.

During 2000, Lexmark's management and board of directors approved a plan to
restructure its worldwide manufacturing and related support operations (the
"2000 restructuring"). The 2000 restructuring plan involved relocating
manufacturing, primarily laser printers, to Mexico and China, and reductions in
associated support infrastructure. Restructuring and related charges of $41.3
million ($29.7 million, net of tax) were expensed during the fourth quarter of
2000. These charges were comprised of $24.3 million of accrued restructuring
costs related to separation and other exit costs, $10.0 million related to asset
impairment charges and $7.0 million associated with a pension curtailment loss
related to the employee separations.

The employee separation costs included severance, medical and other benefits.
The other exit costs were related to vendor and lease cancellation charges and
demolition and cleanup costs associated with the company's manufacturing
relocation. The asset impairment charges resulted from the company's plans to
abandon certain assets (primarily buildings) associated with the relocation of
manufacturing and related support activities. As of December 31, 2001,
substantially all of the employees identified in the 2000 restructuring had
exited the business and received separation benefits.

16

The following table presents a rollforward of the liabilities (in millions)
incurred in connection with the 2000 and 2001 restructuring. These liabilities
are reflected as accrued liabilities in the company's consolidated statements of
financial position.

RESULTS OF OPERATIONS

2001 COMPARED TO 2000

Consolidated revenue in 2001 was $4,143 million, an increase of 9% over 2000.
Revenue was adversely affected by foreign currency exchange rates due to
weakening of European currencies against the U.S. dollar. Revenue growth was 11%
year-to-year on a constant currency basis. Total U.S. revenue increased $212
million or 13% and international revenue, including exports from the U.S.,
increased $124 million or 6%. Revenue from sales to all OEM customers accounted
for less than 10% of consolidated revenue in 2001 with no single OEM customer
accounting for more than 5% of total revenue. The company is continually
pursuing OEM and alliance relationships, and therefore, to the extent that any
single relationship is discontinued, the company would not expect revenue to be
significantly impacted.

The revenue growth was primarily driven by increased sales of laser and inkjet
supplies whose revenue increased 27% over 2000. Laser and inkjet supplies
revenue was $1,962 million for 2001, versus $1,548 million a year earlier, and
represents 47% of total revenue versus 41% in 2000. Laser and inkjet printer
revenue was $1,657 million for 2001, a 2% decline from 2000.

Consolidated gross profit was $1,278 million for 2001, an increase of 2% from
2000. Gross profit as a percentage of revenue was 30.8% for 2001, compared to
33.0% for 2000. Excluding the restructuring-related inventory write-offs of $29
million, consolidated gross profit was $1,307 million and increased 4% for 2001
compared to 2000. Gross profit, excluding restructuring-related charges, as a
percentage of revenue for 2001 decreased to 31.5% from 33.0% in 2000 principally
due to lower laser and inkjet printer margins, partially offset by an increased
mix of supplies.

Total operating expense was $937 million in 2001 and operating expense as a
percentage of revenue was 22.6%. Excluding the restructuring and related charges
of approximately $58 million, total operating expense was $878 million and
increased 10% for 2001 compared to 2000. Operating expense, excluding
restructuring and related charges, as a percentage of revenue increased to 21.2%
in 2001 compared to 21.0% in 2000 primarily due to slightly higher research and
development expense as a percentage of revenue.

Consolidated operating income was $341 million in 2001. Excluding the
restructuring and related charges, consolidated operating income was $429
million and decreased 6% from 2000 primarily due to the lower gross profit
margin.

In 2001, earnings before income taxes were $318 million. Excluding the
restructuring and related charges, earnings before income taxes were $406
million, a decrease of 7% from 2000, reflecting lower operating margins.

17

In 2001, the company reached resolution with the Internal Revenue Service on
certain adjustments related to the intercompany allocation of profits. As a
result of this resolution the company has reversed previously accrued taxes,
reducing the income tax provision in the fourth quarter of 2001 by $40 million,
which reduced the effective income tax rate to 13.9% for 2001.

Net earnings were $274 million in 2001. The restructuring and related charges
net of taxes were approximately $65 million. Earnings excluding restructuring
and related charges and the $40 million benefit from the resolution of income
tax matters were $298 million, down 5% from 2000, primarily due to lower
operating margins partially offset by a reduction in the effective income tax
rate. Excluding the impact of the $40 million tax benefit, the income tax
provision was 26.5% of earnings before taxes in 2001 as compared to 28.0% in
2000. The decrease in the effective income tax rate was primarily due to lower
income tax rates on manufacturing activities in certain countries.

Basic net earnings per share were $2.11 for 2001 compared to $2.22 in 2000. The
restructuring and related charges resulted in a $.50 negative impact on basic
net earnings per share for 2001 and the income tax benefit resulted in a $0.31
positive impact. Basic earnings per share, excluding restructuring and related
charges and the tax benefit, were $2.30 for 2001 and $2.46 for 2000. Diluted net
earnings per share were $2.05 in 2001 before adjusting for the $.48 per share
impact related to the 2001 restructuring actions, and the $.30 income tax
benefit. Diluted earnings per share after removing the restructuring impacts and
the tax benefit were $2.23 in 2001, compared to $2.35 in 2000, a decrease of 5%.
This decrease was due to the decline in net earnings.

The following table sets forth the percentage of total revenue represented by
certain items reflected in the company's statements of earnings, excluding
restructuring and other charges:

2000 COMPARED TO 1999

Consolidated revenue in 2000 was $3,807 million, an increase of 10% over 1999.
Revenue was adversely affected by foreign currency exchange rates due to
weakening of European currencies against the U.S. dollar. Revenue growth was 16%
year-to-year on a constant currency basis. Total U.S. revenue increased $143
million or 9% and international revenue, including exports from the U.S.,
increased $212 million or 11%. Revenue from sales to all OEM customers accounted
for less than 15% of consolidated revenue in 2000 with no single OEM customer
accounting for more than 5% of total revenue.

The revenue growth was primarily driven by increased sales of laser and inkjet
supplies whose revenue increased 35% over 1999. Printer volumes grew at
double-digit rates and associated printer supplies revenue increased during 2000
as compared to 1999 primarily due to the continued growth of the company's
installed printer base. Laser and inkjet supplies revenue was $1,548 million,
versus $1,144 million a year earlier, and represented 41% of total revenue
versus 33% in 1999. Laser and inkjet printer revenue was $1,689 million for
2000, a 2% increase from 1999.

18

Consolidated gross profit was $1,256 million for 2000, an increase of 2% from
1999. Gross profit as a percentage of revenue for 2000 decreased to 33.0% from
35.6% in 1999 principally due to lower hardware margins, unfavorable foreign
currency impact, the cost of airfreight, and a mix shift among products.

Total operating expense was $840 million in 2000. Excluding the restructuring
and related charges of $41 million, total operating expense was $799 million and
increased 6% for 2000 compared to 1999. Operating expense, excluding
restructuring and related charges, as a percentage of revenue decreased to 21.0%
in 2000 compared to 21.8% in 1999 primarily due to lower selling, general and
administrative expense as a percentage of revenue.

Consolidated operating income was $416 million in 2000. Excluding the
restructuring and related charges, consolidated operating income was $457
million and decreased 4% from 1999. Higher revenue and lower selling, general,
and administrative expense as a percentage of revenue were offset by lower
hardware margins, unfavorable foreign currency impact, the cost of airfreight,
and a mix shift among products.

In 2000, earnings before income taxes were $397 million. Excluding the
restructuring and related charges, earnings before income taxes were $438
million, a decrease of 5% from 1999, reflecting lower operating margins.

Net earnings were $285 million in 2000. The restructuring and related charges
net of taxes were $30 million. Earnings excluding restructuring and related
charges were $315 million, down 1% from 1999, primarily due to lower operating
margins partially offset by a reduction in the effective income tax rate. The
income tax provision was 28.0% of earnings before taxes in 2000 as compared to
30.6% in 1999. The decrease in the effective income tax rate was primarily due
to lower income tax rates on manufacturing activities in certain countries.

Basic net earnings per share were $2.22 for 2000 compared to $2.46 in 1999. The
restructuring and related charges resulted in a $.24 negative impact on basic
net earnings per share. Basic earnings per share, excluding restructuring and
related charges, were $2.46 for both 2000 and 1999. Diluted net earnings per
share were $2.13 in 2000 before adjusting for the $.22 per share impact related
to the restructuring actions. Diluted earnings per share after removing the
restructuring impacts were $2.35 in 2000, compared to $2.32 in 1999, an increase
of 1%. This increase was due to fewer shares outstanding partially offset by the
decline in net earnings.

LIQUIDITY AND CAPITAL RESOURCES

Lexmark's primary source of liquidity has been cash generated by operations,
which totaled $196 million, $476 million and $448 million in 2001, 2000 and
1999, respectively. Cash from operations generally has been sufficient to allow
the company to fund its working capital needs and finance its capital
expenditures during these periods along with the repurchase of approximately
$209 million and $302 million of its Class A common stock during 2000 and 1999,
respectively. In the event that cash from operations is not sufficient, the
company has other potential sources of cash such as its revolving credit
facility, accounts receivable financing program and other financing sources such
as the public or private debt markets, which are discussed in greater detail
below.

Cash flows from operating activities in 2001 were $196 million, compared to $476
million in 2000. The decrease in 2001 was primarily due to unfavorable changes
in working capital accounts, principally related to current liabilities. In
2000, cash provided by operating activities increased 6% over 1999 due to
favorable changes in working capital accounts.

The company has short-term non-cancelable purchase commitments with suppliers
which arise in the normal course of business and provide the company with
continuity of supply and lower product cost. If the company fails to anticipate
customer demand properly, a temporary

19

oversupply of inventory could result in excess or obsolete components which
could adversely affect gross margins.

The company has a $300 million unsecured, revolving credit facility with a group
of banks. The interest rate on the credit facility ranges from 0.2% to 0.7%
above London Interbank Offered Rate (LIBOR), as adjusted under certain limited
circumstances, based upon the company's debt rating. In addition, the company
pays a facility fee on the $300 million of 0.1% to 0.3% based upon the company's
debt rating. The interest and facility fees are payable quarterly. The $300
million credit agreement, as amended, contains customary default provisions,
leverage and interest coverage restrictions and certain restrictions on the
incurrence of additional debt, liens, mergers or consolidations and investments.
Any amounts outstanding under the $300 million credit facility are due upon the
maturity of the facility on January 27, 2003. As of December 31, 2001 and 2000,
there were no amounts outstanding under this credit facility.

The company has outstanding $150 million principal amount of 6.75% senior notes
due May 15, 2008, which was initially priced at 98.998%, to yield 6.89% to
maturity. The senior notes contain typical restrictions on liens, sale leaseback
transactions, mergers and sales of assets. There are no sinking fund
requirements on the senior notes and they may be redeemed at any time, at a
redemption price as described in the related indenture agreement, as
supplemented and amended, in whole or in part, at the option of the company. A
balance of $149 million (net of unamortized discount of $1 million) was
outstanding at December 31, 2001.

The company is in compliance with all covenants and other requirements set forth
in its debt agreements. The company does not have any rating downgrade triggers
that would accelerate the maturity dates of its revolving credit facility and
public debt. However, a downgrade in the company's credit rating could adversely
affect the company's ability to renew existing, or obtain access to new, credit
facilities in the future and could increase the cost of such facilities.

In February 2001, the company filed a shelf registration statement with the
Securities and Exchange Commission to register $200 million of debt securities.
The company expects to use the net proceeds from the sale of the securities for
capital expenditures, reduction of short-term borrowings, working capital,
acquisitions and other general corporate purposes.

The following table summarizes the company's contractual obligations at December
31, 2001:
- --------------------------------------------------------------------------------

In October 2001, the company entered into a new agreement to sell its U.S. trade
receivables on a limited recourse basis. The new agreement increased the maximum
amount of financing available to $225 million. As collections reduce previously
sold receivables, the company may replenish these with new receivables. The
company bears a risk of bad debt losses on U.S. trade receivables sold, since
the company over-collateralizes the receivables sold with additional eligible
receivables. The company addresses this risk of loss in its allowance for
doubtful accounts. Receivables sold may not include amounts over 90 days past
due or concentrations over certain limits with any one customer. This facility
contains customary affirmative and negative covenants as well as specific
provisions related to the quality of the accounts receivables sold. The facility
also contains customary cash control triggering events which, if triggered,
could adversely affect the company's liquidity and/or its ability to sell trade

20

receivables. A downgrade in the company's credit rating could reduce the
company's ability to sell trade receivables. The facility expires in October
2004, but requires annual renewal of commitments in October 2002 and 2003. At
December 31, 2001, U.S. trade receivables of $85 million had been sold and, due
to the revolving nature of the agreement, $85 million also remained outstanding.

The company's previous agreement to sell its U.S. trade receivables on a limited
recourse basis was amended in October 2000, and the maximum amount of U.S. trade
receivables to be sold was increased from $150 million to $170 million. At
December 31, 2000, U.S. trade receivables of $170 million had been sold and also
remained outstanding.

At December 31, 2001 and 2000, the company did not have any relationship with
unconsolidated entities or financial partnerships, which other companies have
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. Therefore, the company is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if the company had engaged in such relationships.

At the company's Annual Meeting of Stockholders on April 27, 2000, the
stockholders approved an increase in the number of authorized shares of its
Class A common stock from 450 million to 900 million shares.

In February 2002, the company received authorization from the board of directors
to repurchase an additional $200 million of its Class A common stock for a total
repurchase authority of $1.2 billion. This repurchase authority allows the
company, at management's discretion, to selectively repurchase its stock from
time to time in the open market or in privately negotiated transactions
depending upon market price and other factors. During 2001, the company did not
repurchase shares of its Class A common stock. As of December 31, 2001, the
company had repurchased approximately 29 million shares at prices ranging from
$10.63 to $105.38 per share for an aggregate cost of approximately $882 million,
leaving approximately $118 million of share repurchase authority. As of March 8,
2002, the company has repurchased approximately 30 million shares for an
aggregate cost of approximately $959 million, leaving approximately $241 million
of share repurchase authority.

CAPITAL EXPENDITURES

Capital expenditures totaled $214 million, $297 million and $220 million in
2001, 2000 and 1999, respectively. The capital expenditures during the past
three years were primarily attributable to capacity expansion, the support of
new products and research and development facilities. Looking forward to 2002,
the company expects capital expenditures to be approximately $150 million
primarily attributable to new product development, infrastructure support and
the completion of capacity expansion projects initiated in prior years. The
capital expenditures are expected to be funded primarily through cash from
operations.

EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT

Revenue derived from international operations, including exports from the United
States, made up more than half of the company's consolidated revenue, with
European revenue accounting for about two-thirds of international revenue.
Substantially all foreign subsidiaries maintain their accounting records in
their local currencies. Consequently, period-to-period comparability of results
of operations is affected by fluctuations in exchange rates. Certain of the
company's Latin American entities use the U.S. dollar as their functional
currency. Lexmark's operations in Argentina were adversely impacted by currency
devaluation in late 2001. This resulted in translation losses of approximately
$2 million in December 2001. The company has continued to experience translation
losses as a result of further deterioration in Argentina's currency, which could
have an adverse impact in the future.

21

Currency translation has significantly affected international revenue and cost
of revenue, and although it did not have a material impact on operating income
for the years 1999 and 2001, the 2000 operating income was materially adversely
impacted by exchange rate fluctuations. The company attempts to reduce its
exposure to exchange rate fluctuations through the use of operational hedges,
such as pricing actions and product sourcing decisions.

The company's exposure to exchange rate fluctuations generally cannot be
minimized solely through the use of operational hedges. Therefore, the company
utilizes financial instruments such as forward exchange contracts and currency
options to reduce the impact of exchange rate fluctuations on actual and
anticipated cash flow exposures and certain assets and liabilities which arise
from transactions denominated in currencies other than the functional currency.
The company does not purchase currency related financial instruments for
purposes other than exchange rate risk management.

TAX MATTERS

The company's effective income tax rate was approximately 14%, 28% and 31% for
2001, 2000 and 1999, respectively. The 2001 effective income tax rate was
significantly impacted by the company's resolution with the Internal Revenue
Service on certain adjustments related to the intercompany allocation of
profits. As a result of this resolution, the company has reversed previously
accrued taxes, reducing the tax provision in the fourth quarter of 2001 by $40
million, which reduced the effective income tax rate by 13%. Excluding the
impact of this adjustment, the company's effective income tax rate was 27% for
2001. The decrease in the income tax rate was primarily due to the effect of
lower tax rates on manufacturing activities in certain countries.

The company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. The company believes that adequate amounts of tax and
related interest have been provided for any adjustments that may result from
these examinations.

As of December 31, 2001, the company had non-U.S. tax loss carryforwards of $33
million, including $4 million which are not expected to provide a future benefit
because they are attributable to certain non-U.S. entities that are also taxable
in the U.S.

NEW ACCOUNTING STANDARDS

In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
Accounting for Certain Sales Incentives, which provides that some sales
incentives should be treated as reductions in revenue and other sales incentives
should be classified as cost of sales. In April 2001, the EITF deferred the
effective date for this issue to quarters beginning after December 15, 2001.
This statement is not expected to have a material impact on the company's
financial position, results of operations or cash flows.

The EITF has discussed several issues related to loyalty programs and vendor
payments to retailers in connection with the promotion of the vendor's products.
EITF 00-22, Accounting for "Points" and Certain Other Time-based or Volume-based
Sales Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future, addresses loyalty programs that offer awards consisting of the
vendor's products or services. In January 2001, a consensus was reached on one
of the five issues discussed. The EITF concluded that offers to customers to
rebate or refund a specified amount of cash that is redeemable only if the
customer meets a specified cumulative level of revenue transactions should be
recognized as a reduction of revenue. The effective date for application of this
consensus was set for no later than the quarter ending after February 15, 2001.
Adoption of this consensus did not have a material impact on the company's
financial position, results of operations or cash flows.

EITF 00-25, Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products, addresses
when consideration paid to a retailer

22

should be classified as a reduction of revenue. In April 2001, a consensus was
reached that consideration from a vendor to a purchaser of the vendor's products
is presumed to be a reduction in the selling prices of the vendor's products
and, therefore, should be characterized as a reduction of revenue. That
presumption can be overcome and the consideration should be characterized as a
cost incurred if certain criteria are met. The consensus is effective for annual
or interim financial statements beginning after December 15, 2001. This
statement is not expected to have a material impact on the company's financial
position, results of operations or cash flows, although it will result in a
reclassification from selling, general and administrative expense to revenue.

In June 2001, the Financial Accounting Standards Board ("FASB") approved the
issuance of Statement of Financial Accounting Standard ("SFAS") No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method of accounting. SFAS No. 142
states that goodwill should not be amortized, but should be tested for
impairment annually at the reporting unit level. All other intangible assets
should be amortized over their useful lives. Certain provisions of SFAS No. 141
and SFAS No. 142 are effective for companies with fiscal years beginning after
December 15, 2001. These statements are not expected to have a material impact
on the company's financial position, results of operations or cash flows.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. SFAS No.
144 establishes a single accounting model, based on the framework established in
SFAS No. 121, for the impairment or disposal of long-lived assets. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. This statement is not expected
to have a material impact on the company's financial position, results of
operations and cash flows.

INFLATION

The company is subject to the effects of changing prices and operates in an
industry where product prices are very competitive and subject to downward price
pressures. As a result, future increases in production costs or raw material
prices could have an adverse effect on the company's business. However, the
company actively manages its product costs and manufacturing processes in an
effort to minimize the impact on earnings of any such increases.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS

Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
company. There can be no assurance that future developments affecting the
company will be those anticipated by management, and there are a number of
factors that could adversely affect the company's future operating results or
cause the

23

company's actual results to differ materially from the estimates or expectations
reflected in such forward-looking statements, including without limitation, the
factors set forth below:

- - Unfavorable global economic conditions may adversely impact the company's
future operating results. Since the second quarter of 2001, the company has
experienced weak markets for its products. Continued softness in these markets
and uncertainty about the timing and extent of the global economic downturn by
both corporate and consumer purchasers of the company's products could result in
lower demand for the company's products. Weakness in demand may result in excess
inventory for the company and/or its reseller channel which may adversely affect
its operating results.

- - The company's future operating results may be adversely affected if it is
unable to continue to develop, manufacture and market products that meet
customers' needs. The markets for laser and inkjet printers and associated
supplies are increasingly competitive, especially with respect to pricing and
the introduction of new technologies and products offering improved features and
functionality. The company and its major competitors, many of which have
significantly greater financial, marketing and/or technological resources than
the company, have regularly lowered prices on their printers and are expected to
continue to do so. In particular, both the inkjet and laser printer markets have
experienced and are expected to continue to experience significant price
pressure. Price reductions on inkjet or laser printer products or the inability
to reduce costs, contain expenses or increase sales as currently expected, as
well as price protection measures, could result in lower profitability and
jeopardize the company's ability to grow or maintain its market share. The
company believes that one of its competitive advantages is its exclusive focus
on printing solutions. The entrance of a competitor that is also exclusively
focused on printing solutions could offset this advantage and could have a
material adverse impact on the company's strategy and financial results.

- - The company's performance depends in part upon its ability to successfully
forecast the timing and extent of customer demand and manage worldwide
distribution and inventory levels to support the demand of its customers, and to
address production and supply constraints, particularly delays in the supply of
key components necessary for production, which may result in the company
incurring additional costs to meet customer demand. The company's future
operating results and its ability to effectively grow or maintain its market
share may be adversely affected if it is unable to address these issues on a
timely basis.

- - Delays in customer purchases of existing products in anticipation of new
product introductions by the company or its competitors and market acceptance of
new products and pricing programs, the reaction of competitors to any such new
products or programs, the life cycles of the company's products, as well as
delays in product development and manufacturing, and variations in the cost of
component parts, may cause a buildup in the company's inventories, make the
transition from current products to new products difficult and could adversely
affect the company's future operating results. The competitive pressure to
develop technology and products also could cause significant changes in the
level of the company's operating expenses.

- - Terrorist attacks, such as those that took place in the United States on
September 11, 2001, and the potential for future terrorist attacks have created
many political and economic uncertainties, some of which may affect the
company's future operating results. Future terrorist attacks, the national and
international responses to such attacks, and other acts of war or hostility may
affect the company's facilities, employees, suppliers, customers, transportation
networks and supply chains, or may affect the company in ways that are not
capable of being predicted presently.

- - Revenue derived from international sales make up over half of the company's
revenue. Accordingly, the company's future results could be adversely affected
by a variety of factors, including changes in a specific country's or region's
political or economic conditions, foreign currency exchange rate fluctuations,
trade protection measures and unexpected changes in regulatory requirements.
Moreover, margins on international sales tend to be lower than those
24

on domestic sales, and the company believes that international operations in new
geographic markets will be less profitable than operations in the U.S. and
European markets, in part, because of the higher investment levels for
marketing, selling and distribution required to enter these markets.

- - The company is beginning to rely more heavily on its international production
facilities and international manufacturing partners for the manufacture of its
products and key components of its products. Future operating results may be
adversely affected by several factors, including, without limitation, if the
company's international operations or manufacturing partners are unable to
supply products reliably, if there are disruptions in international trade, if
there are difficulties in transitioning such manufacturing activities from the
company to its international operations or manufacturing partners, or if there
arise production and supply constraints which result in additional costs to the
company.

- - The company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate without
infringing the proprietary rights of others. Current or future claims of
intellectual property infringement could prevent the company from obtaining
technology of others and could otherwise adversely affect its operating results
or business, as could expenses incurred by the company in obtaining intellectual
property rights, enforcing its intellectual property rights against others or
defending against claims that the company's products infringe the intellectual
property rights of others.

- - The company markets and sells its products through several sales channels. The
company's future results may be adversely affected by any conflicts that might
arise between or among its various sales channels. The company has advanced a
strategy of forming alliances and OEM arrangements with many companies. One such
OEM customer is Compaq Computer Corporation ("Compaq"), which represented less
than three percent of the company's revenue in 2001, and the consummation of the
HP/Compaq merger is likely to result in the loss of Compaq as a customer.

- - Factors unrelated to the company's operating performance, including the loss
of significant customers, manufacturing partners or suppliers; the outcome of
pending and future litigation or governmental proceedings; and the ability to
retain and attract key personnel, could also adversely affect the company's
operating results. In addition, the company's stock price, like that of other
technology companies, can be volatile. Trading activity in the company's common
stock, particularly the trading of large blocks and intraday trading in the
company's common stock, may affect the company's common stock price.

While the company reassesses material trends and uncertainties affecting the
company's financial condition and results of operations in connection with the
preparation of its quarterly and annual reports, the company does not intend to
review or revise, in light of future events, any particular forward-looking
statement contained in this report.

The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this report, in any of the
company's public filings or press releases or in any oral statements made by the
company or any of its officers or other persons acting on its behalf. The
important factors that could affect forward-looking statements are subject to
change, and the company does not intend to update the foregoing list of certain
important factors. By means of this cautionary note, the company intends to
avail itself of the safe harbor from liability with respect to forward-looking
statements that is provided by Section 27A and Section 21E referred to above.

25

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK SENSITIVITY

The market risk inherent in the company's financial instruments and positions
represents the potential loss arising from adverse changes in interest rates and
foreign currency exchange rates.

Interest Rates
- --------------
At December 31, 2001, the fair value of the company's senior notes is estimated
at $146 million using quoted market prices and yields obtained through
independent pricing sources for the same or similar types of borrowing
arrangements, taking into consideration the underlying terms of the debt. The
carrying value of the senior notes as recorded in the statements of financial
position exceeded the fair value at December 31, 2001 by approximately $3
million. Market risk is estimated as the potential change in fair value
resulting from a hypothetical 10% adverse change in interest rates and amounts
to approximately $5 million at December 31, 2001.

Foreign Currency Exchange Rates
- -------------------------------
The company employs a foreign currency hedging strategy to limit potential
losses in earnings or cash flows from adverse foreign currency exchange rate
movements. Foreign currency exposures arise from transactions denominated in a
currency other than the company's functional currency and from foreign
denominated revenue and profit translated into U.S. dollars. The primary
currencies to which the company is exposed include the euro and other European
currencies, the Japanese yen and other Asian and South American currencies.
Exposures are hedged with foreign currency forward contracts, put options, and
call options with maturity dates of less than eighteen months. The potential
loss in fair value at December 31, 2001 for such contracts resulting from a
hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $41 million. This loss would be mitigated by corresponding gains
on the underlying exposures.

26

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

28

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 2001 AND 2000
(In Millions, Except Par Value)
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

29

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Millions)
- --------------------------------------------------------------------------------

- -------------------------------------------------------------------------------

See notes to consolidated financial statements.

30

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Millions)
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

31

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

32

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions, Except per Share Amounts)

1. ORGANIZATION AND BUSINESS

Lexmark International Group, Inc. ("Group") merged with and into its
wholly-owned subsidiary, Lexmark International, Inc. ("International") effective
July 1, 2000, whereby International became the surviving corporation (the
"company"). Pursuant to the merger, Group's stockholders automatically received
one share of the company's Class A common stock for each share of Group Class A
common stock, along with the associated rights attaching pursuant to the
Stockholder Rights Plan, to which the company is a successor. The company's
Class A common stock and associated rights have the same rights and privileges
as Group's Class A common stock and associated rights. The company also assumed
all of Group's benefit plans for employees, retirees and directors and each
outstanding Group stock based award was converted into an identical stock based
award in the company. Hereafter, the "company" and "Lexmark" will refer to Group
for all events prior to July 1, 2000 and will refer to International for all
events subsequent to the merger.

Lexmark is a leading developer, manufacturer and supplier of printing
solutions -- including laser and inkjet printers, multifunction products,
associated supplies and services -- for offices and homes. The company also
sells dot matrix printers for printing single and multi-part forms by business
users and develops, manufactures and markets a broad line of other office
imaging products. The principal customers for the company's products are
dealers, retailers and distributors worldwide. The company's products are sold
in over 150 countries in North and South America, Europe, the Middle East,
Africa, Asia, the Pacific Rim and the Caribbean.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the
company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Foreign Currency Translation:

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated into U.S. dollars at period-end exchange rates.
Income and expense accounts are translated at average exchange rates prevailing
during the period. Adjustments arising from the translation of assets and
liabilities are accumulated as a separate component of accumulated other
comprehensive earnings in stockholders' equity.

Critical Accounting Policies and Estimates:

The preparation of consolidated financial statements requires the company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the company evaluates its estimates,
including those related to customer programs and incentives, product returns,
bad debts, inventories, intangible assets, income taxes, warranty obligations,
restructuring, pensions and other post-retirement benefits, and contingencies
and litigation. The company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

33

The company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. The company records estimated reductions to revenue for
customer programs and incentive offerings including special pricing agreements,
price protection, promotions and other volume-based incentives. If market
conditions were to decline, the company may take actions to increase customer
incentive offerings, possibly resulting in an incremental reduction of revenue
at the time the incentive is offered. The company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. The company provides for
the estimated cost of product warranties at the time revenue is recognized.
While the company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its component
suppliers, the company's warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from the company's estimates, revisions to the estimated
warranty liability would be required. The company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value. Likewise, the company
records an adverse purchase commitment liability when anticipated market sales
prices are lower than committed costs. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
and adverse purchase commitment liabilities may be required. Management also
considers potential impairment of both tangible and intangible assets when
circumstances indicate that the carrying amount of an asset may not be
recoverable.

The company estimates the expected return on plan assets, discount rate,
involuntary turnover rate, rate of compensation increase and future health care
costs, among other things, and relies on actuarial estimates to assess the
future potential liability and funding requirements of the company's pension,
postretirement and postemployment plans. These estimates, if incorrect, could
have a significant impact on the company's consolidated financial position,
results of operations or cash flows. The company estimates its tax liability
based on current tax laws in the statutory jurisdictions in which it operates.
These estimates include judgments about deferred tax assets and liabilities
resulting from temporary differences between assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes,
as well as about the realization of deferred tax assets. If the provisions for
current or deferred taxes are not adequate, if the company is unable to realize
certain deferred tax assets or if the tax laws change unfavorably, the company
could experience potential significant losses in excess of the reserves
established. Likewise, if the provisions for current and deferred taxes are in
excess of those eventually needed, if the company is able to realize additional
deferred tax assets or if tax laws change favorably, the company could
experience potential significant gains.

Cash Equivalents:

All highly liquid investments with an original maturity of three months or less
at the company's date of purchase are considered to be cash equivalents.

Fair Value of Financial Instruments:

The financial instruments of the company consist mainly of cash and cash
equivalents, trade receivables, short-term debt and long-term debt. The fair
value of cash and cash equivalents, trade receivables and short-term debt
approximates their carrying values due to the relatively short-term nature of
the instruments. The fair value of long-term debt is based on current rates
available to the company for debt with similar characteristics.

34

Inventories:

Inventories are stated at the lower of average cost or market. The company
considers all raw materials to be in production upon their receipt.

Property, Plant and Equipment:

Property, plant and equipment are stated at cost and depreciated over their
estimated useful lives using the straight-line method. Property, plant and
equipment accounts are relieved of the cost and related accumulated depreciation
when assets are disposed of or otherwise retired.

Internal Use Software Costs:

The costs for internal use software are capitalized and depreciated over the
useful life of the software, generally three years.

Long-Lived Assets:

The company performs reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount. If future expected
undiscounted cash flows are insufficient to recover the carrying value of the
assets, then an impairment loss is recognized based upon the excess of the
carrying value of the asset over the anticipated cash flows on a discounted
basis.

Revenue Recognition:

The company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. These criteria are generally met at the time product
is shipped and title passes. At the time revenue is recognized, the company
provides for the estimated cost of post-sales support and product warranties and
reduces revenue for estimated product returns. When other significant
obligations remain after products are delivered, revenue is recognized only
after such obligations are fulfilled. Revenue earned from services is recognized
ratably over the contractual period or as the services are performed. In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The company adopted SAB 101
as required by December 31, 2000 and the adoption did not have a material impact
on the company's financial position, results of operations or cash flows.

Advertising Costs:

The company expenses advertising costs when incurred. Advertising expense was
approximately $116.6 million, $128.3 million and $121.4 million in 2001, 2000
and 1999, respectively.

Postretirement Benefits:

The company accrues the cost of providing postretirement benefits for medical
and life insurance coverage over the active service period of the employee.
These benefits are funded by the company when paid.

35

Stock-Based Compensation:

The company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB Opinion
25, Accounting for Stock Issued to Employees, and has provided in Note 13 of the
Notes to Consolidated Financial Statements the pro forma disclosures of the
effect on net income and earnings per common share as if the fair value-based
method had been applied in measuring compensation expense.

Income Taxes:

The provision for income tax is computed based on pre-tax income included in the
statements of earnings. The company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.

Derivatives:

Effective January 1, 1999, the company adopted Statement of Financial Accounting
Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires that all derivatives, including foreign
currency exchange contracts, be recognized in the statement of financial
position at their fair value. Derivatives that are not hedges must be recorded
at fair value through earnings. If a derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative are either
offset against the change in fair value of underlying assets or liabilities
through earnings or recognized in other comprehensive earnings until the
underlying hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value is to be immediately recognized in earnings.
In June 2000, SFAS No. 138 was issued as an amendment to SFAS No. 133. This
statement amended the treatment of certain transactions discussed in SFAS No.
133. This new amendment did not have a material impact on the company's results
of operations or financial position.

Net Earnings Per Share:

Basic net earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the reported period. The
calculation of diluted net earnings per share is similar to basic, except that
the weighted average number of shares outstanding includes the additional
dilution from potential common stock such as stock options and stock under
long-term incentive plans.

Comprehensive Earnings (Loss):

Other comprehensive earnings (loss) refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive earnings (loss) but are excluded from net income as these amounts
are recorded directly as an adjustment to stockholders' equity, net of tax. The
company's other comprehensive earnings (loss) is composed of deferred gains and
losses on cash flow hedges, foreign currency translation adjustments and
adjustments made to recognize additional minimum liabilities associated with the
company's defined benefit pension plans.

Segment Data:

The company manufactures and sells a variety of printers and associated supplies
that have similar economic characteristics as well as similar customers,
production processes and distribution methods and, therefore, has aggregated
similar divisions and continues to report one segment.

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Recent Pronouncements:

In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
Accounting for Certain Sales Incentives, which provides that some sales
incentives should be treated as reductions in revenue and other sales incentives
should be classified as cost of sales. In April 2001, the EITF deferred the
effective date for this issue to quarters beginning after December 15, 2001.
This statement is not expected to have a material impact on the company's
financial position, results of operations or cash flows.

The EITF has discussed several issues related to loyalty programs and vendor
payments to retailers in connection with the promotion of the vendor's products.
EITF 00-22, Accounting for "Points" and Certain Other Time-based or Volume-based
Sales Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future, addresses loyalty programs that offer awards consisting of the
vendor's products or services. In January 2001, a consensus was reached on one
of the five issues discussed. The EITF concluded that offers to customers to
rebate or refund a specified amount of cash that is redeemable only if the
customer meets a specified cumulative level of revenue transactions should be
recognized as a reduction of revenue. The effective date for application of this
consensus was set for no later than the quarter ending after February 15, 2001.
Adoption of this consensus did not have a material impact on the company's
financial position, results of operations or cash flows.

EITF 00-25, Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products, addresses
when consideration paid to a retailer should be classified as a reduction of
revenue. In April 2001, a consensus was reached that consideration from a vendor
to a purchaser of the vendor's products is presumed to be a reduction in the
selling prices of the vendor's products and, therefore, should be characterized
as a reduction of revenue. That presumption can be overcome and the
consideration should be characterized as a cost incurred if certain criteria are
met. The consensus is effective for annual or interim financial statements
beginning after December 15, 2001. This statement is not expected to have a
material impact on the company's financial position, results of operations or
cash flows, although it will result in a reclassification from selling, general
and administrative expense to revenue.

In June 2001, the Financial Accounting Standards Board ("FASB") approved the
issuance of Statement of Financial Accounting Standard ("SFAS") No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method of accounting. SFAS No. 142
states that goodwill should not be amortized, but should be tested for
impairment annually at the reporting unit level. All other intangible assets
should be amortized over their useful lives. Certain provisions of SFAS No. 141
and SFAS No. 142 are effective for companies with fiscal years beginning after
December 15, 2001. These statements are not expected to have a material impact
on the company's financial position, results of operations or cash flows.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. SFAS No.
144 establishes a single accounting model, based on the framework established in
SFAS No. 121, for the impairment or disposal of long-lived assets. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. This statement is not expected
to have a material impact on the company's financial position, results of
operations and cash flows.

37

Reclassifications:

Certain prior year amounts have been reclassified to conform to the 2001
presentation.

3. RESTRUCTURING AND OTHER CHARGES

During the fourth quarter of 2001, Lexmark's management and board of directors
approved a restructuring plan (the "2001 restructuring") that includes a
reduction in the company's global workforce of up to 12 percent. This plan
provides for a reduction in infrastructure and overhead expenses, the
elimination of the company's business class inkjet printer, and the closure of
an electronic card manufacturing facility in Reynosa, Mexico. Restructuring and
related charges of $58.4 million ($42.9 million, net of tax) were expensed
during the fourth quarter of 2001. These charges were comprised of $36.0 million
of accrued restructuring costs related to separation and other exit costs, $11.4
million associated with a pension curtailment related to the employee
separations and $11.0 million related to asset impairment charges. The company
also recorded $29.3 million ($21.6 million, net of tax) of associated
restructuring-related inventory write-offs resulting from the company's decision
to eliminate its business class inkjet printer, to limit the period over which
the company will provide replacement parts for products no longer in production,
and to exit the electronic card manufacturing business. The inventory write-offs
are included in the cost of revenue line on the statements of earnings.

The accrued restructuring costs for employee separations of $26.3 million are
associated with approximately 1,600 employees worldwide from various business
functions and job classes. Employee separation benefits include severance,
medical and other benefits. As of December 31, 2001, approximately 200 employees
had exited the business under the 2001 restructuring plan.

The other exit costs of $9.7 million are primarily related to vendor and lease
cancellation charges.

The $11.0 million charge for asset impairment was determined in accordance with
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of "
and resulted from the company's decision to abandon certain assets consisting
primarily of machinery and equipment used to manufacture business class inkjet
printers and electronic cards. The charge for asset impairments is included in
the restructuring and related charges line of the statements of earnings.

In total, the company expects the 2001 pre-tax charge of $87.7 million to result
in cash payments of approximately $36.0 million and non-cash charges of
approximately $51.7 million. The cash payments are primarily for employee
separations and other exit costs. Restructuring activities are expected to be
substantially completed during the year 2002.

During 2000, Lexmark's management and board of directors approved a plan to
restructure its worldwide manufacturing and related support operations (the
"2000 restructuring"). The 2000 restructuring plan involved relocating
manufacturing, primarily laser printers, to Mexico and China, and reductions in
associated support infrastructure. Restructuring and related charges of $41.3
million ($29.7 million, net of tax) were expensed during the fourth quarter of
2000. These charges were comprised of $24.3 million of accrued restructuring
costs related to separation and other exit costs, $10.0 million related to asset
impairment charges and $7.0 million associated with a pension curtailment loss
related to the employee separations.

The employee separation costs included severance, medical and other benefits.
The other exit costs were related to vendor and lease cancellation charges and
demolition and cleanup costs associated with the company's manufacturing
relocation. The asset impairment charges resulted from the company's plans to
abandon certain assets (primarily buildings) associated with the relocation of
manufacturing and related support activities. As of December 31, 2001,
substantially all of the employees identified in the 2000 restructuring had
exited the business and received separation benefits.

38

The following table presents a rollforward of the liabilities (in millions)
incurred in connection with the 2000 and 2001 restructuring. These liabilities
are reflected as accrued liabilities in the company's consolidated statements of
financial position.

4. RECEIVABLES

The company's trade receivables are reported in the consolidated statements of
financial position net of allowances for doubtful accounts and product returns.

In the U.S., the company sells its receivables to a wholly-owned subsidiary,
Lexmark Receivables Corporation ("LRC"), which then sells the receivables to an
unrelated third party. LRC is a separate legal entity with its own separate
creditors who, in a liquidation of LRC, would be entitled to be satisfied out of
LRC's assets prior to any value in LRC becoming available for equity claims of
the company. The company accounts for the transfers of receivables as sales
transactions.

In October 2001, the company entered into a new agreement to sell its U.S. trade
receivables on a limited recourse basis. The new agreement increased the maximum
amount of financing available to $225.0 million. As collections reduce
previously sold receivables, the company may replenish these with new
receivables. The company bears a risk of bad debt losses on U.S. trade
receivables sold, since the company over-collateralizes the receivables sold
with additional eligible receivables. The company addresses this risk of loss in
its allowance for doubtful accounts. Receivables sold may not include amounts
over 90 days past due or concentrations over certain limits with any one
customer. This facility contains customary affirmative and negative covenants as
well as specific provisions related to the quality of the accounts receivables
sold. The facility expires in October 2004, but requires annual renewal of
commitments in October 2002 and 2003. At December 31, 2001, U.S. trade
receivables of $85.0 million had been sold and, due to the revolving nature of
the agreement, $85.0 million also remained outstanding.

The company's previous agreement to sell its U.S. trade receivables on a limited
recourse basis was amended in October 2000, and the maximum amount of U.S. trade
receivables to be sold was increased from $150.0 million to $170.0 million. At
December 31, 2000, U.S. trade receivables of $170.0 million had been sold and
also remained outstanding.

Expenses incurred under this program totaling $7.1 million, $8.5 million, and
$5.4 million for 2001, 2000 and 1999, respectively, are included in other
expense in the statements of earnings.

In 1997, the company entered into three-year interest rate swaps with a total
notional amount of $60.0 million, whereby the company paid interest at a fixed
rate of approximately 6.5% and received interest at a floating rate equal to the
three-month LIBOR. Since May 1998, the swaps served as a hedge of the
receivables financings which were based on floating interest rates. These
interest rate swaps expired during 2000. Expense of $0.1 million and $0.7
million for 2000

39

and 1999, respectively, related to these swaps is included in other expense in
the statements of earnings.

5. INVENTORIES

Inventories consisted of the following at December 31:

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at December 31:

Depreciation expense was $125.3 million, $91.1 million and $79.8 million for
2001, 2000 and 1999, respectively.

7. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

8. DEBT

The company has outstanding $150.0 million principal amount of 6.75% senior
notes due May 15, 2008, which was initially priced at 98.998%, to yield 6.89% to
maturity. A balance of $149.1 million (net of unamortized discount of $0.9
million) was outstanding at December 31, 2001. At December 31, 2000, the balance
was $148.9 million (net of unamortized discount of $1.1 million). The senior
notes contain typical restrictions on liens, sale leaseback transactions,
mergers and sales of assets. There are no sinking fund requirements on the
senior notes and

40

they may be redeemed at any time, at a redemption price as described in the
related indenture agreement, as supplemented and amended, in whole or in part,
at the option of the company.

The company also has a $300.0 million unsecured, revolving credit facility with
a group of banks. The interest rate on the credit facility ranges from 0.2% to
0.7% above London Interbank Offered Rate (LIBOR), as adjusted under certain
limited circumstances, based upon the company's debt rating. In addition, the
company pays a facility fee on the $300.0 million of 0.1% to 0.3% based upon the
company's debt rating. The interest and facility fees are payable quarterly.

The $300.0 million credit agreement, as amended, contains customary default
provisions, leverage and interest coverage restrictions and certain restrictions
on the incurrence of additional debt, liens, mergers or consolidations and
investments. Any amounts outstanding under the $300.0 million credit facility
are due upon the maturity of the facility on January 27, 2003. As of December
31, 2001 and 2000 there were no amounts outstanding under this credit facility.

The company's Brazilian operation has a short-term, uncommitted line of credit
with an outstanding balance of $11.0 million at December 31, 2001. There were no
amounts outstanding under this line of credit at December 31, 2000. The interest
rate on this line of credit varies based upon the local prevailing interest
rates at the time of borrowing. During 2001, the interest rate on this line of
credit averaged approximately 18%.

In February 2001, the company filed a shelf registration statement with the
Securities and Exchange Commission to register $200 million of debt securities.
The company expects to use the net proceeds from the sale of the securities for
capital expenditures, reduction of short-term borrowings, working capital,
acquisitions and other general corporate purposes.

Total cash paid for interest amounted to $14.3 million, $15.9 million and $14.3
million in 2001, 2000 and 1999, respectively.

9. INCOME TAXES

The provision for income taxes consisted of the following:

Earnings before income taxes were as follows:

41

The company realized an income tax benefit from the exercise of certain stock
options in 2001, 2000 and 1999 of $54.7 million, $61.2 million and $47.8
million, respectively. This benefit resulted in a decrease in current income
taxes payable and an increase in capital in excess of par.

In 2001, the company reached resolution with the Internal Revenue Service on
certain adjustments related to the intercompany allocation of profits. As a
result of this resolution, the company has reversed previously accrued taxes,
reducing the tax provision in the fourth quarter of 2001 by $40.0 million or
$0.30 per share.

The company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. The company believes that adequate amounts of taxes
and related interest have been provided for any adjustments that may result from
these examinations.

Significant components of deferred income taxes at December 31 were as follows:

The net decrease in the total valuation allowance for the years ended December
31, 2001 and 2000 was $0.0 million and $1.8 million, respectively. The company
has non-U.S. tax loss carryforwards of $32.9 million which have an indefinite
carryforward period. Of these non-U.S. tax loss carryforwards, $4.1 million are
not expected to provide a future benefit because they are attributable to
certain non-U.S. entities that are also taxable in the U.S.

At December 31, 2001, the research and development tax credit carryforward
available to reduce possible future U.S. income taxes amounted to approximately
$19.2 million, which expire in the years 2019-2021.

Deferred income taxes have not been provided on the undistributed earnings of
foreign subsidiaries. Undistributed earnings of non-U.S. subsidiaries included
in the consolidated retained earnings were approximately $332.4 million. These
earnings have been substantially reinvested, and the company does not plan to
initiate any action that would precipitate the payment of income taxes. It is
not practicable to estimate the amount of additional tax that may be payable on
the foreign earnings.

42

A reconciliation of the provision for income taxes using the U.S. statutory rate
and the company's effective tax rate was as follows:

Cash paid for income taxes was $32.1 million, $35.1 million and $58.3 million in
2001, 2000 and 1999, respectively.

10. STOCK SPLIT

On April 29, 1999, the company announced a two-for-one stock split. The stock
split was effected in the form of a stock dividend on June 10, 1999 and entitled
each stockholder of record on May 20, 1999 to receive one share of Class A
common stock for each share of Class A common stock held on the record date. All
share and per share data included in the accompanying consolidated financial
statements and related notes have been restated to reflect this stock split.

11. STOCKHOLDERS' EQUITY

The Class A common stock is voting and exchangeable for Class B common stock in
very limited circumstances. The Class B common stock is non-voting and is
convertible, subject to certain limitations, into Class A common stock.

At the company's Annual Meeting of Stockholders on April 27, 2000, the
stockholders approved an increase in the number of authorized shares of its
Class A common stock from 450.0 million to 900.0 million shares.

At December 31, 2001, approximately 718.4 million and 1.8 million shares of
Class A and Class B common stock were unissued and unreserved. These shares are
available for a variety of general corporate purposes, including future public
offerings to raise additional capital and for facilitating acquisitions.

In February 2002, the company received authorization from the board of directors
to repurchase an additional $200 million of its Class A common stock for a total
repurchase authority of $1.2 billion. This repurchase authority allows the
company, at management's discretion, to selectively repurchase its stock from
time to time in the open market or in privately negotiated transactions
depending upon market price and other factors. During 2001, the company did not
repurchase shares of its Class A common stock. As of December 31, 2001, the
company had repurchased 28.6 million shares at prices ranging from $10.63 to
$105.38 per share for an aggregate cost of approximately $882 million. As of
December 31, 2001, the company had reissued 0.1 million shares of previously
repurchased shares in connection with employee

43

benefit programs. As a result of these issuances, the net treasury shares
outstanding at December 31, 2001 were 28.5 million. As of March 8, 2002, the
company had repurchased 30.1 million shares for an aggregate cost of
approximately $959 million.

In 1998, the company's board of directors adopted a stockholder rights plan (the
"Rights Plan") which now provides existing stockholders with the right to
purchase one one-thousandth (0.001) of a share of Series A Junior Participating
preferred stock for each share of common stock held in the event of certain
changes in the company's ownership. The rights will expire on January 31, 2009,
unless earlier redeemed by the company.

12. EARNINGS PER SHARE

Options to purchase an additional 1.9 million shares of Class A common stock at
prices between $60.98 and $130.06 per share were outstanding at December 31,
2001 but were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
of the common shares.

Options to purchase an additional 1.6 million shares of Class A common stock at
prices between $108.00 and $130.06 per share were outstanding at December 31,
2000 but were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
of the common shares.

44

Options to purchase an additional 40 thousand shares of Class A common stock at
prices between $82.81 and $87.06 per share were outstanding at December 31, 1999
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares.

13. STOCK INCENTIVE PLANS

The company has various stock incentive plans to encourage employees and
non-employee directors to remain with the company and to more closely align
their interests with those of the company's stockholders. In April 2001, the
company's stockholders approved an amendment to the company's stock incentive
plan to increase the number of shares authorized for issuance by 4.8 million
shares. Under the employee plans, as of December 31, 2001 approximately 5.7
million shares of Class A common stock are reserved for future grants in the
form of stock options, stock appreciation rights, restricted stock, performance
shares or deferred stock units. Under the non-employee director plan, as of
December 31, 2001 approximately 0.2 million shares of Class A common stock are
reserved for future grants in the form of stock options and deferred stock
units. As of December 31, 2001, awards under the programs have been limited to
stock options, restricted stock, performance shares and deferred stock units.

The exercise price of options awarded under stock option plans is equal to the
fair market value of the underlying common stock on the date of grant. Generally
options expire ten years from the date of grant and generally become fully
vested at the end of five years based upon continued employment or the
completion of three years of service on the board of directors. In some cases,
option vesting and exercisability may be accelerated due to the achievement of
performance objectives.

The company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans
other than for restricted stock, performance-based awards and deferred stock
units. Had compensation expense for the company's stock option plans been
determined based on the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS No. 123, Accounting
for Stock-Based Compensation, net earnings and earnings per share would have
been reduced to the pro forma amounts indicated in the table below:

45

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

The weighted average fair value of options granted during 2001, 2000 and 1999
was $23.02, $47.05 and $24.41 per share, respectively.

A summary of the status of the company's stock option plans as of December 31,
2001, 2000 and 1999 and changes during the years then ended is presented below:

As of December 31, 2001, 2000 and 1999 there were 5.0 million, 6.5 million and
6.4 million options exercisable, respectively.

The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001:

As of December 31, 2001, the company had granted approximately 420,000
restricted stock units with various vesting periods. During 2001, 2000, and
1999, respectively, the company granted 140,000, 86,000 and 26,000 restricted
stock units with weighted average grant prices of $49.98,

46

$51.16 and $83.37. The cost of the awards, determined to be the fair market
value of the shares at the date of grant, is charged to compensation expense
ratably over the vesting periods.

The company has also issued approximately 252,000 deferred stock units to
certain members of management who have elected to defer all or a portion of
their annual bonus into such units which are 100% vested at all times.

In addition, the company awarded approximately 134,000 performance shares, the
vesting of which was based on the attainment of certain performance goals by the
end of the four year period 1997 through 2000. Based on the certification in
early 2001 that such performance goals were satisfied, the shares are now fully
vested. The compensation expense in connection with the performance shares was
estimated over the four year period based on the fair market value of the shares
during that period. In order to mitigate the impact of stock price changes on
compensation expense, the company entered into a forward equity contract on its
common stock during 2000 which was settled in cash in 2001.

The company has recorded compensation expense of $4.4 million, $3.2 million and
$4.3 million in 2001, 2000 and 1999, respectively, related to these stock
incentive plans.

During 1999, stockholders approved an Employee Stock Purchase Plan ("ESPP")
which became effective January 1, 2000. The ESPP enables substantially all
regular employees to purchase full or fractional shares of Lexmark Class A
common stock through payroll deductions of up to 10% of eligible compensation.
The price an employee pays is 85% of the closing market price on the last
business day of each month. During 2001 and 2000, employees paid the company
$8.2 million and $8.7 million, respectively, to purchase approximately 0.2
million shares and approximately 0.2 million shares, respectively. As of
December 31, 2001, there were approximately 2.6 million shares of Class A common
stock reserved for future purchase under the ESPP.

47

14. EMPLOYEE PENSION AND POSTRETIREMENT PLANS

The company and its subsidiaries have retirement plans covering substantially
all regular employees. Medical, dental and life insurance plans for retirees are
provided by the company and certain of its non-U.S. subsidiaries. Plan assets
are invested in equity securities, government and agency securities, corporate
debt and annuity contracts. The changes in the benefit obligations and plan
assets for 2001 and 2000 were as follows:

The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $523.4 million, $520.5 million and $413.2 million,
respectively, as of December 31, 2001, and $41.0 million, $37.7 million and
$11.1 million, respectively, as of December 31, 2000.

The company's accumulated other comprehensive loss related to additional minimum
pension liability as of December 31, 2001 and 2000 was $100.0 million ($62.0
million, net of tax) and $5.7 million ($3.6 million, net of tax), respectively,
for plans where the accumulated benefit obligation exceeded the fair value of
assets.

In 1998, the U.S. converted to a new formula for determining pension benefits.
As of December 31, 1999, benefits under the previous plan were frozen with no
further benefits being accrued, resulting in a $5.5 million decrease in pension
cost for 2000.

Effective January 1, 2000, the U.S. postretirement plan was amended primarily to
limit benefits paid to post-medicare recipients to a specified dollar amount
beginning in 2003. This resulted in a $5.6 million reduction in the benefit
obligation in 2000.

For measurement purposes, an 11% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2002. The rate is assumed to
decrease gradually to 5.25% in 2009 and remain at that level thereafter. Since
the net employer costs for postretirement medical benefits reach the preset caps
within the next four to six years, a 1% increase or decrease in trend has a de
minimis effect on costs.

Related to the company's acquisition of the Information Products Corporation
from IBM in 1991, IBM agreed to pay for its pro rata share (currently estimated
at $67.3 million) of future postretirement benefits for all the company's U.S.
employees based on relative years of service with IBM and the company.

The company also sponsors defined contribution plans for employees in certain
countries. Company contributions are based upon a percentage of employees'
contributions. The company's expense under these plans was $10.0 million, $8.5
million and $6.4 million in 2001, 2000 and 1999, respectively.

15. DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

In 1999, the company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The company recorded a net-of-tax cumulative-effect-type
loss adjustment of $0.4 million in accumulated other comprehensive earnings to
recognize at fair value all derivatives that were designated as cash-flow
hedging instruments upon adoption of SFAS No. 133 on January 1, 1999. This loss
adjustment, which the company reclassified to earnings by

49

March 31, 2000, consisted of a $0.6 million loss related to interest rate swaps
and a $0.2 million gain related to foreign currency options.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The company's activities expose it to a variety of market risks, including the
effects of changes in foreign currency exchange rates and interest rates. The
financial exposures are monitored and managed by the company as an integral part
of its overall risk management program. The company's risk management program
seeks to reduce the potentially adverse effects that the volatility of the
markets may have on its operating results.

The company maintains a foreign currency risk management strategy that uses
derivative instruments to protect its interests from unanticipated fluctuations
in earnings and cash flows caused by volatility in currency exchange rates. The
company does not hold or issue financial instruments for trading purposes nor
does it hold or issue leveraged derivative instruments.

The company maintains an interest rate risk management strategy that may, from
time to time use derivative instruments to minimize significant, unanticipated
earnings fluctuations caused by interest rate volatility. The company's goal is
to maintain a balance between fixed and floating interest rates on its financing
activities.

By using derivative financial instruments to hedge exposures to changes in
exchange rates and interest rates, the company exposes itself to credit risk and
market risk. The company manages exposure to counterparty credit risk by
entering into derivative financial instruments with highly rated institutions
that can be expected to fully perform under the terms of the agreement. Market
risk is the adverse effect on the value of a financial instrument that results
from a change in currency exchange rates or interest rates. The company manages
exposure to market risk associated with interest rate and foreign exchange
contracts by establishing and monitoring parameters that limit the types and
degree of market risk that may be undertaken.

The company uses the following hedging strategies to reduce the potentially
adverse effects that market volatility may have on its operating results:

Fair Value Hedges: Fair value hedges are hedges of recognized assets or
liabilities. The company enters into forward exchange contracts to hedge actual
purchases and sales of inventories. The forward contracts used in this program
mature in three months or less, consistent with the related purchase and sale
commitments. Foreign exchange option contracts, as well as forward contracts,
may be used as fair value hedges in situations where derivative instruments, for
which hedge accounting has been discontinued, expose earnings to further change
in exchange rates.

Cash Flow Hedges: Cash flow hedges are hedges of forecasted transactions or of
the variability of cash flows to be received or paid related to a recognized
asset or liability. The company enters into foreign exchange options and forward
exchange contracts expiring within eighteen months as hedges of anticipated
purchases and sales that are denominated in foreign currencies. These contracts
are entered into to protect against the risk that the eventual cash flows
resulting from such transactions will be adversely affected by changes in
exchange rates. The company also enters into currency swap contracts to hedge
foreign currency risks that result from the transfer of various currencies
within the company. The currency swap contracts entered into generally expire
with one month. The company also may use interest rate swaps to convert a
portion of its variable rate financing activities to fixed rates.

ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES

All derivatives are recognized in the statement of financial position at their
fair value. Fair values for the company's derivative financial instruments are
based on quoted market prices of comparable instruments or, if none are
available, on pricing models or formulas using current

50

assumptions. On the date the derivative contract is entered into, the company
designates the derivative as either a fair value or cash flow hedge. Changes in
the fair value of a derivative that is highly effective as -- and that is
designated and qualifies as -- a fair value hedge, along with the loss or gain
on the hedged asset or liability are recorded in current period earnings in cost
of revenues. Changes in the fair value of a derivative that is highly effective
as -- and that is designated and qualifies as -- a cash flow hedge are recorded
in other comprehensive earnings, until the underlying transactions occur.

At December 31, 2001, the company had derivative assets of $26.6 million
classified as prepaid expenses and other current assets as well as derivative
liabilities of $18.8 million classified as accrued liabilities. At December 31,
2000, the company had derivative assets of $43.1 million classified as prepaid
expenses and other current assets as well as derivative liabilities of $56.9
million classified as accrued liabilities. As of December 31, 2001, a total of
$14.9 million of deferred net losses on derivative instruments were accumulated
in other comprehensive earnings (loss), of which $13.9 million is expected to be
reclassified to earnings during the next twelve months. As of December 31, 2000
a total of $13.8 million of deferred net losses on derivative instruments were
accumulated in other comprehensive earnings (loss), of which $11.9 million was
reclassified to earnings during 2001.

The company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge items. This process includes linking all derivatives
that are designated as fair value and cash flow to specific assets and
liabilities on the balance sheet or to forecasted transactions. The company also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair value or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, the company discontinues
hedge accounting prospectively, as discussed below.

The company discontinues hedge accounting prospectively when (1) it is
determined that a derivative is no longer effective in offsetting changes in the
fair value or cash flows of a hedged item; (2) the derivative expires or is
sold, terminated, or exercised or (3) the derivative is discontinued as a hedge
instrument, because it is unlikely that a forecasted transaction will occur. As
of December 31, 2001 no hedges were determined to be ineffective.

When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried in the statement of financial position at its fair
value. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried in the statement of financial position at its fair value, and gains and
losses that were accumulated in other comprehensive earnings are recognized
immediately in earnings. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value in the statement
of financial position, with changes in its fair value recognized in current
period earnings. A fair value hedge is entered into when the derivative
instrument, for which hedge accounting has been discontinued, exposes earnings
to further change in exchange rates.

FINANCIAL INSTRUMENTS

At December 31, 2001, the carrying value of the company's long-term debt was
$149.1 million and the fair value was $146.2 million. At December 31, 2000, the
carrying value of the company's long-term debt was $148.9 million and the fair
value was $135.0 million. The fair value of the long-term debt was estimated
based on current rates available to the company for debt with similar
characteristics. At December 31, 2001, the carrying value of the company's short
term debt was $11.0 million, which approximated the fair value.

51

CONCENTRATIONS OF CREDIT RISK

The company's main concentrations of credit risk consist primarily of temporary
cash investments and trade receivables. Cash investments are made in a variety
of high quality securities with prudent diversification requirements. Credit
risk related to trade receivables is dispersed across a large number of
customers located in various geographic areas. The company sells a large portion
of its products through third-party distributors and resellers and if the
financial condition or operations of these distributors and resellers were to
deteriorate substantially, the company's operating results could be adversely
affected. However, the company performs ongoing credit evaluations of the
financial position of its third-party distributors, resellers and other
customers to determine appropriate credit limits. Collateral such as letters of
credit and bank guarantees is required in certain circumstances. No individual
distributor or reseller accounted for more than 10% of the company's trade
receivables at December 31, 2001. The company has off-balance sheet credit risk
for the reimbursement from IBM of its pro rata share of postretirement benefits
to be paid by the company (see Note 14).

The company generally has experienced longer accounts receivable cycles in its
emerging markets, in particular, Asia Pacific and Latin America, when compared
to its U.S. and European markets. In the event that accounts receivable cycles
in these developing markets lengthen further, the company could be adversely
affected.

16. COMMITMENTS AND CONTINGENCIES

The company is committed under operating leases (containing various renewal
options) for rental of office and manufacturing space and equipment. Rent
expense (net of rental income of $2.0 million, $2.9 million and $3.3 million)
was $42.2 million, $39.6 million, and $36.6 million in 2001, 2000 and 1999,
respectively. Future minimum rentals under terms of non-cancelable operating
leases at December 31 are: 2002-$31.0 million; 2003-$23.0 million; 2004-$18.0
million; 2005-$16.2 million; 2006-$13.4 million and thereafter-$28.3 million.

The company is subject to legal proceedings and claims that arise in the
ordinary course of business. The company does not believe that the outcome of
any of those matters will have a material adverse effect on the company's
financial position, results of operations or cash flows.

17. SEGMENT DATA

The company manufactures and sells a variety of printers and associated supplies
that have similar economic characteristics as well as similar customers,
production processes and distribution methods and, therefore, has aggregated
similar divisions and continues to report one segment.

The following are revenue and long-lived asset information by geographic area
for and as of December 31:

Revenue reported above is based on the countries to which the products are
shipped.

52

Revenue information is categorized by product among inkjet and laser printers,
inkjet and laser supplies, and other. This revenue information is provided in
order to give additional insight into Lexmark's strategic model by quantifying
the company's printers and supplies revenue growth.

The following is revenue by product category as of December 31:

53

18. QUARTERLY FINANCIAL DATA (UNAUDITED)

*The sum of the quarterly earnings per share amounts do not necessarily equal
the year-to-date earnings per share due to changes in average share
calculations. This is in accordance with prescribed reporting requirements.

(1) Amounts include the impact of the $87.7 million ($64.5 million, net of tax)
restructuring and other charges recorded during the fourth quarter of 2001.
Inventory write-offs of $29.3 million associated with the restructuring actions
were included in gross profit, and operating income included the inventory
write-offs and the restructuring and related charges of $58.4 million. Diluted
EPS was reduced by 48 cents during the fourth quarter of 2001 as a result of the
restructuring and other charges.

(2) Net earnings were also impacted by a $40 million benefit from the resolution
of income tax matters. Diluted EPS was increased by 30 cents during the fourth
quarter of 2001 as a result of the resolution of income tax matters.

(3) Amounts include the impact of the $41.3 million ($29.7 million, net of tax)
restructuring and related charges recorded during the fourth quarter of 2000.
Diluted EPS was reduced by 22 cents during the fourth quarter of 2000 as a
result of the restructuring and related charges.

54

MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS

The consolidated financial statements and related information included in this
Financial Report are the responsibility of management and have been reported in
conformity with accounting principles generally accepted in the United States of
America. All other financial data in this Annual Report have been presented on a
basis consistent with the information included in the consolidated financial
statements. Lexmark International, Inc. maintains a system of financial controls
and procedures, which includes the work of corporate auditors, which we believe
provides reasonable assurance that the financial records are reliable in all
material respects for preparing the consolidated financial statements and
maintaining accountability for assets. The concept of reasonable assurance is
based on the recognition that the cost of a system of financial controls must be
related to the benefits derived and that the balancing of those factors requires
estimates and judgment. This system of financial controls is reviewed, modified
and improved as changes occur in business conditions and operations, and as a
result of suggestions from the corporate auditors and PricewaterhouseCoopers
LLP.

The Finance and Audit Committee, composed of outside members of the Board of
Directors, meets periodically with management, the independent accountants and
the corporate auditors, for the purpose of monitoring their activities to ensure
that each is properly discharging its responsibilities. The Finance and Audit
Committee, independent accountants, and corporate auditors have free access to
one another to discuss their findings.

/s/ Paul J. Curlander

Paul J. Curlander
Chairman and chief executive officer

/s/ Gary E. Morin

Gary E. Morin
Executive vice president and chief financial officer

55

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Lexmark International, Inc.

In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of earnings, cash flows, and
stockholders' equity and comprehensive earnings appearing on pages 28 through 53
of this annual report on Form 10-K present fairly, in all material respects, the
consolidated financial position of Lexmark International, Inc. and subsidiaries
at December 31, 2001 and 2000, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. These consolidated financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Lexington, Kentucky
February 12, 2002

56

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Except with respect to information regarding the executive officers of the
Registrant, the information required by Part III, Item 10 of this Form 10-K is
incorporated by reference herein, and made part of this Form 10-K, from the
company's definitive Proxy Statement for its 2002 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission,
pursuant to Regulation 14A, not later than 120 days after the end of the fiscal
year. The information with respect to the executive officers of the Registrant
is included under the heading "Executive Officers of the Registrant" in Item 1
above.

ITEM 11. EXECUTIVE COMPENSATION

Information required by Part III, Item 11 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by Part III, Item 12 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by Part III, Item 13 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders, which will filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

57

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1 FINANCIAL STATEMENTS:

Financial statements filed as part of this Form 10-K are included under
Part II, Item 8.

(a)2 FINANCIAL STATEMENT SCHEDULE:

All other schedules are omitted as the required information is inapplicable or
the information is presented in the Consolidated Financial Statements or related
notes.

58

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of Lexmark International, Inc.

Our audits of the consolidated financial statements referred to in our report
dated February 12, 2002 appearing on page 56 of this annual report on Form 10-K
also included an audit of the financial statement schedule listed in item
14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule on
page 60 of this Form 10-K presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Lexington, Kentucky
February 12, 2002

59

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(DOLLARS IN MILLIONS)

60

ITEM 14(a)(3). EXHIBITS

Exhibits for the company are listed in the Index to Exhibits beginning on page
E-1.

(b) REPORTS ON FORM 8-K

Current Reports on Form 8-K dated October 22, 2001 and November 8, 2001 were
filed by the company with the Securities and Exchange Commission to announce the
company's restructuring plans and to provide Regulation FD disclosure
information, respectively.

61

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Lexington,
Commonwealth of Kentucky, on March 19, 2002.

LEXMARK INTERNATIONAL, INC.

By /s/ Paul J. Curlander
------------------------------------
Name: Paul J. Curlander
Title: Chairman and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the following capacities and on the dates indicated.

62

INDEX TO EXHIBITS

E-1

E-2

- ---------------

* Confidential treatment previously granted by the Securities
and Exchange Commission.
+ Indicates management contract or compensatory plan, contract
or arrangement.
(1) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000
(Commission File No. 1-14050).
(2) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 (Commission
File No. 1-14050).
(3) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001
(Commission File No. 1-14050).
(4) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (Commission
File No. 1-14050).
(5) Incorporated by reference to the company's Amended
Registration Statement on Form 8-A filed with the Commission
on March 12, 1999 (Commission File No. 1-14050).
(6) Incorporated by reference to the company's Form S-1
Registration Statement, Amendment No. 2 (Registration No.
33-97218) filed with the Commission on November 13, 1995.
(7) Incorporated by reference to the company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1996
(Commission File No. 1-14050).
(8) Incorporated by reference to the company's Form S-1
Registration Statement (Registration No. 33-97218) filed
with the Commission on September 22, 1995.
(9) Incorporated by reference to the company's Form S-1
Registration Statement, Amendment No. 1 (Registration No.
33-97218), filed with the Commission on October 27, 1995.
(10) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999 (Commission
File No. 1-14050).
(11) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998
(Commission File No. 1-14050).
(12) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (Commission
File No. 1-14050).
(13) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999
(Commission File No. 1-14050).

E-3

(14) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 (Commission File No. 1-14050).
(15) Incorporated by reference to the company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 (Commission File No. 1-14050).
(16) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2001 (Commission File No. 1-14050).

E-4